If you own an investment property, or you are thinking about buying one, the recent Federal Budget changed the rules in ways you will want to understand. The Treasurer announced two significant reforms to how residential property investment is taxed in Australia, with the changes set to take effect from 1 July 2027. Here is a plain-English breakdown of what is changing, who is affected, and how it might shape your next investment decision.
First, a quick refresher. Negative gearing is when the costs of holding an investment property (mortgage interest, maintenance, rates, depreciation) exceed the rental income, creating a paper loss. Under current rules, that loss can be deducted against the investor's other taxable income, such as salary, reducing the total tax bill. Capital gains tax (CGT) applies to the profit you make when you sell an investment, with a 50 per cent discount currently available to individuals who have held the asset for more than 12 months.
The government's stated aim is to level the playing field for first home buyers, preserve the gains existing investors have already made, and steer new investment toward new housing supply, where Australia faces a structural shortage.
From 1 July 2027, two changes will apply to how residential property investment is taxed:
- Negative gearing on existing residential property will be limited. Losses can only be deducted against income from other residential properties (including capital gains) rather than salary or wages. The current benefit remains for investors who buy new builds.
- The 50 per cent CGT discount will be replaced with cost base indexation linked to the Consumer Price Index (CPI), plus a new minimum tax rate of 30 per cent on real capital gains.
Properties held at the time of announcement (7:30pm AEST, 12 May 2026) are exempt from the negative gearing changes. The CGT reforms will only apply to gains that accrue after 1 July 2027.
Changes to Negative Gearing
Under current tax settings, losses from a rental property can be used to reduce other forms of taxable income, such as salary and wages. This has encouraged leveraged property investment that delivers greater tax advantages than those available to owner occupiers.
From 1 July 2027, losses related to existing residential investment properties purchased from 7:30pm AEST, 12 May 2026, will only be deductible against other income from residential properties, including capital gains. Where an investor has excess losses, they will be able to carry that excess forward to offset residential property income in future years. This carry-forward arrangement ensures investors remain able to claim deductions in future for costs such as maintenance.
These changes will apply to individuals, partnerships, companies and most trusts. Widely held trusts (for example, most managed investment trusts) and superannuation funds, including self-managed super funds (SMSFs), are excluded.
The impact on existing investments will be limited. Properties held at announcement (7:30pm AEST, 12 May 2026) will be exempt from the negative gearing changes.
Changes to Capital Gains Tax
The current 50 per cent CGT discount was introduced in 1999, allowing taxpayers to reduce their taxable capital gain by half rather than adjusting for inflation. The result is that the discount does not accurately approximate the inflation component of gains, meaning investors are either undercompensated or overcompensated depending on their actual return.
Returning to indexation based on the Consumer Price Index (CPI) aligns with the original intent of the CGT regime and supports productivity over time by ensuring investment decisions are taken for economic reasons rather than tax outcomes.
Indexation will be calculated using CPI in a similar manner to arrangements previously in place between 1985 and 1999. The Australian Taxation Office (ATO) will provide guidance and tools to support the calculation. These changes will apply to all CGT assets, including property and shares, held by individuals, partnerships and trusts for at least 12 months. Applying these changes broadly across asset classes keeps the CGT settings broadly neutral with only targeted exemptions.
A minimum tax rate of 30 per cent will apply to real capital gains accruing from 1 July 2027, with no impact until the income is realised. This will not affect people whose capital gains are already taxed at rates of at least 30 per cent. The minimum tax reduces the benefit of deferring capital gains realisation to years where marginal tax rates are low, ensuring gains are subject to a tax rate closer to the rate the investor faced during their working life and commensurate with the tax rate paid by most workers. Recipients of means-tested income support payments, such as the Age Pension or JobSeeker, will be exempt from the minimum tax if they receive any payment in the financial year in which they realise the capital gain.
Negative Gearing and Its Impact on Borrowing Capacity
When determining borrowing capacity, lenders factor in any negative gearing benefits as part of the loan serviceability calculation. With the new tax reforms limiting those benefits to new builds, lenders will need to adjust their serviceability assessments accordingly. This forms part of their responsible lending obligations, ensuring property investors can afford their investment loans once the changes come into effect.
In practice, the same gross income may translate to a lower borrowing capacity for established residential property purchases after 1 July 2027. That makes investment timing, structure, and the choice between new builds and established property more important than ever.
Talk to a Mortgage Broker
Trying to work out what these changes mean for your investment strategy, or planning your first investment property purchase? Book a free consultation with Dhaniro Mortgage Solutions and we will walk you through your borrowing capacity, the best loan structure for your situation, and how the timing of your purchase affects your tax treatment, at no cost to you. Book a call or phone us on 0451 473 343.
This article is general information only and is not personal tax or financial advice. Tax positions vary by individual circumstances. Speak to a licensed accountant or financial adviser before making investment decisions.