For a long time, the maths behind owning an investment property has been fairly simple.
Many investors accepted making a loss each year because those losses reduced the tax they paid on their salary, while any capital growth when the property was eventually sold generally qualified for the 50% CGT discount.
The 2026 Federal Budget changes that equation.
Most of the discussion has centred around Capital Gains Tax, but the reality is that the CGT reforms and the new negative gearing rules work together. Looking at one without the other can give a very misleading picture.
Existing investors are mostly unaffected
The good news is that many current investment property owners won’t notice any change to how their annual rental losses are treated.
If your property was already owned before 7:30pm AEST on 12 May 2026 (Budget night), the existing negative gearing rules continue to apply for as long as you own that property. Rental losses can still be claimed against your salary and other taxable income just as they are today.
Capital Gains Tax is a little different.
Rather than being based on when you bought the property, the new CGT rules apply to the portion of the capital gain that accrues from 1 July 2027 onwards. Any growth before that date continues to be taxed under the existing rules.
What changes for future property purchases?
The biggest change affects people who purchase established residential investment properties after Budget night.
From 1 July 2027, if that property makes a rental loss:
- the loss can still be offset against rental income from residential properties;
- any unused losses can be carried forward indefinitely; and
- those carried forward losses can be used to reduce future residential property capital gains.
What changes is that those losses can no longer reduce your salary or wage income.
That doesn’t mean the deduction disappears. It simply means you don’t receive the tax benefit until a later date, usually when the property is eventually sold.
Capital Gains Tax has also changed
The Government has also replaced the traditional 50% CGT discount for future gains with a new inflation based system.
In broad terms:
- any capital gain that accrued before 1 July 2027 continues under the existing CGT rules;
- gains accruing after that date are calculated under the new indexation method; and
- those post 2027 gains are subject to a minimum 30% tax regardless of your individual tax rate.
Investors who purchase eligible new residential developments may be able to elect to remain under the existing 50% CGT discount rather than using the new indexed method.
A practical example
To see how the two changes apply to an existing investor, it helps to follow one property through the transition and consider both its annual rental losses and its eventual Capital Gains Tax outcome.
Assume an investor purchased an established residential investment property on 1 July 2015 for $100,000. The property is valued at $180,000 on 1 July 2027, creating a pre-2027 gain of $80,000. The investor then sells the property in 2030 for $250,000.
Because the property was purchased before 7:30pm AEST on 12 May 2026, the existing negative gearing rules continue to apply for as long as the investor owns it. If the property generates $25,000 in rental losses after 1 July 2027, those losses can still be claimed against the investor’s salary and other taxable income. They are not quarantined and carried forward to reduce the eventual capital gain.
However, the investor’s CGT calculation is affected by the reforms and is split into two parts.
The first part is the $80,000 gain that accrued before 1 July 2027. The existing 50% CGT discount still applies, so $40,000 is added to the investor’s taxable income after applying the 50% Discount. If the investor is on the top marginal rate of 47%, the tax on this portion is approximately $18,800
The second part is the gain that accrued after 1 July 2027. For simplicity we will not apply indexation to the 1 July 2027 market value which happens in practice. With a sale price of $250,000 the post-2027 gain is $70,000. This amount is not eligible for the 50% discount and is added to the taxpayers taxable income. Tax on this post 1 July 2027 gain is $32,900. Meaning the new net capital gain under the new rules is $110,000 and total tax payable of $51,700. Under the old rules the taxpayer would of had a net capital gain of 75,000 and paid $35,250 of tax.
This example shows that an existing investor may continue to receive the annual cash-flow benefit of negative gearing, while still being affected by the new CGT treatment on growth that occurs from 1 July 2027 onwards.
What does this mean in practice?
For many investors, the biggest impact isn’t necessarily the total amount of tax they pay over the life of the investment; it’s the timing.
Historically, annual tax refunds generated through negative gearing often helped offset the cost of holding an investment property.
For many future purchasers of established properties, that benefit will now be delayed until the property is sold. As a result, investors may need stronger cash flow to comfortably hold the property over the long term.
There is, however, an important distinction for investors who purchase an eligible new residential development. New builds can continue to be negatively geared, meaning rental losses may still be offset against salary and other taxable income. Investors may also be able to choose between retaining the existing 50% CGT discount and applying the new inflation-indexed method.
This means the tax treatment of a new build may be materially different from that of an established property purchased after Budget night. Investors weighing up the two options will need to consider not only the property itself, but also the cash-flow benefits, timing of deductions and eventual CGT outcome.
When you combine these changes, the after-tax outcome of an investment property can look quite different to what many Australians have been used to over the past 20 years.
Planning for the changes
These reforms don’t mean investment property is no longer a worthwhile investment.
What they do mean is that investors need to think beyond the annual tax refund.
Cash flow, the timing of tax deductions and the eventual CGT outcome have become much more closely connected than they were under the previous rules.
The worked example also shows why it can be misleading to assess the negative gearing and CGT reforms separately. The cash-flow impact, the treatment of carried-forward losses and the split between pre- and post-2027 capital growth all need to be considered together.
If you’re thinking about buying an investment property, reviewing your existing portfolio, or weighing up the difference between purchasing an established property or a new build, it’s worth getting advice before making a decision.
Book a 15-minute discovery call with one of our advisers and let’s chat.
Disclaimer: This article contains general information only and does not constitute financial advice. Please speak with a qualified adviser before making any decisions based on your personal circumstances.
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