What Recent Budget Changes Could Mean for Your Investment Property

The 2026–27 Federal Budget proposes two significant changes to the tax treatment of residential investment property. For existing property investors, the impact depends almost entirely on when the property was acquired and when it is ultimately sold. 

Negative gearing: what changes and what does not

Under the Budget proposal, the key date for negative gearing is 7:30pm AEST on 12 May 2026. Residential properties held at that time, including properties under contract but not yet settled, are grandfathered. Investors in this position retain the ability to offset rental losses against their other assessable income, such as salary, for as long as they hold that property. Their existing deductibility remains unchanged under the negative gearing reforms.

The position is different for established residential properties acquired after that time. From 1 July 2027, losses from those properties can only be offset against rental income or capital gains from other residential property. Losses that cannot be used in a given year are carried forward and may be applied against residential property income in future years. Critically, they cannot be applied against wages, business income or broader investment returns.

For investors holding multiple properties across different acquisition dates, the portfolio would operate under two different sets of rules simultaneously.

Capital gains tax: the transitional split

The CGT changes require careful attention to timing. The 50% CGT discount is proposed to be replaced from 1 July 2027 by cost base indexation, combined with a minimum 30% tax on net capital gains. However, transitional rules preserve the discount for gains accrued before that date.

For investors who purchased before 1 July 2027 and sell after that date, the gain is effectively split at the transition point. The gain accrued up to then, calculated as the difference between the original cost base and the property’s market value, remains eligible for the 50% discount. Only the gain accruing after that point would be subject to the new indexation and minimum tax regime.

The valuation of the property at 1 July 2027 is a critical variable. Investors may use either a formal market valuation or a specified apportionment formula based on the asset’s growth rate over the holding period. The choice of method may materially affect the tax outcome on sale. In the absence of an arm’s length transaction at that date, valuations may be open to scrutiny.

A worked example: Catherine

Catherine purchased an established investment property in 2018 for $700,000. By 1 July 2027, its market value has grown to $1,100,000. She sells in 2029 for $1,350,000.

On the pre‑transition gain of $400,000, Catherine is eligible to apply the 50% CGT discount, bringing the assessable amount to $200,000. For the post‑transition period, Catherine has a nominal gain of $250,000, however this amount is not taxed directly. Instead, the 1 July 2027 value of $1,100,000 becomes the new cost base and is indexed for inflation over the two years to sale. Assuming inflation of 2.5% per annum, the indexed cost base becomes approximately $1,155,660, resulting in a taxable real gain of $194,340. Tax is then applied to this amount at Catherine’s marginal rate, subject to a minimum 30% tax rate.

The combined tax outcome is materially different from what would have applied had the full gain been assessed under either the old or new rules alone, with the final liability influenced by both inflation and Catherine’s marginal tax rate in the year of sale.

Illustrative example only. 

The combined effect

For investors who have owned established investment properties for many years, the transitional CGT rules largely protect what has already been built. Gains to date remain eligible for the 50% discount, with the new tax burden applying only to growth from 1 July 2027 onward.

The more relevant question is how the loss of broad negative gearing deductibility for properties acquired after 12 May 2026 changes the cash flow assumptions behind an investment strategy. For grandfathered properties, those assumptions remain intact. For any subsequent acquisitions, they do not.

For most investors, what you already own continues much as expected. What you buy next needs to work without relying on the same tax settings.