The 2026 Federal Budget, released on 12 May, announced two tax reforms with major implications for property investors: abolishing the current 50% Capital Gains Tax (CGT) discount and restricting negative gearing on second-hand residential properties — both effective from 1 July 2027.
These reforms were presented as a package to improve housing affordability for first-home buyers and young Australians, but their scope is broader — the CGT discount removal affects all CGT assets, not just housing.
How Is CGT Changing?
Under current rules, if you hold an investment property for more than 12 months before selling, only half the profit is added to your assessable income — an effective rate of ~23.5% at the top marginal rate of 47%. This discount is now squarely in the government’s crosshairs.
New Rules from 1 July 2027
The 50% CGT discount will be replaced by cost base indexation plus a 30% minimum tax on net capital gains for assets held longer than 12 months. This applies to all CGT assets held by individuals, trusts, and partnerships — including pre-1985 assets.
Transitional Arrangements (Critical)
- For assets held before 1 July 2027 and sold after: gains accumulated up to that date retain the 50% discount
- Gains arising from 1 July 2027 onward are subject to indexation and the minimum tax, using the asset’s value on that date as the cost base
- In plain English: capital gains you’ve already accumulated are protected
What’s Unaffected
- ✅ Main residence exemption — unchanged
- ✅ Super fund CGT discount — expected to remain
- ✅ Income support recipients (including Age Pensioners) — exempt from the minimum tax
How Is Negative Gearing Changing?
Negative gearing occurs when the cost of holding a rental property exceeds the rental income it generates, producing a net rental loss. The benefit under current rules is that this loss can offset other income like salary or wages.
New Rules from 1 July 2027
For second-hand residential properties acquired after 7:30pm AEST on 12 May 2026:
- Losses can only be deducted against rental income or capital gains from residential property
- Losses can no longer offset salary, wages, or other non-property income
- Unused rental losses can be carried forward to future years to offset future residential property income or gains — so spending on repairs and improvements isn’t penalised
The Hard Cutoff
⚠️ Any investment property acquired before 7:30pm AEST on 12 May 2026 remains under the current rules until sold. This applies to contracts signed before that cutoff, even if settlement hasn’t occurred yet.
What’s Exempt? (The Important Bits)
| Exempt Category | Detail |
|---|---|
| Eligible new builds | Exempt from negative gearing restrictions |
| New residential CGT choice | Investors can choose between the current 50% CGT discount or the new indexation + minimum tax regime — pick whichever works better |
| Widely held trusts | Excluded from negative gearing change |
| Superannuation funds | Unaffected |
| Build-to-rent projects | Unaffected |
| Private investors supporting government housing programs | Unaffected |
Commercial property, shares, and other asset classes continue under existing tax rules — these are unaffected by the negative gearing reform.
Practical Impact by Buyer Type
🏠 For Existing Investors
Properties acquired before the 12 May 2026 cutoff are grandfathered — existing negative gearing treatment continues and accumulated gains retain the 50% CGT discount. No need to panic-sell.
🆕 For Prospective Investors
7:30pm AEST, 12 May 2026 is the hard line.
Any second-hand residential property acquired after this timestamp faces a significantly weakened negative gearing function going forward. A clear market trend is already emerging: investment demand will shift from second-hand to new builds, because new builds retain both negative gearing and the CGT discount choice (best of both worlds).
This is a structural tailwind for Sydney’s off-the-plan apartment and new home market.
🏡 For Owner-Occupiers
The main residence exemption is untouched — your family home is completely unaffected by both reforms.
⏱️ The Time Window
Material changes don’t kick in until 1 July 2027, giving the market roughly one year to adjust. But purchase decisions should be driven by fundamentals first — location, rental yield, supply-demand dynamics — not by chasing or fleeing tax policy.
In One Sentence
The era of second-hand residential investment isn’t over — but the scales are tilting decisively towards new builds. If you’re considering entering the market — whether as an owner-occupier or investor — understanding these changes matters more than ever.
This article is based on publicly available information from the May 2026 Federal Budget and analysis by authoritative tax and legal sources including Baker McKenzie.
📌 This article does not constitute tax or investment advice. Individual tax circumstances vary. Please consult a licensed tax professional regarding specific investment decisions.
