Real Estate · Australia

Negative Gearing and the CGT Discount: What Changed

The May 2026 Budget announced the most significant change to Australian property investment tax in decades. It does not take effect until 1 July 2027, and a great deal depends on one timestamp: 7.30pm AEST on 12 May 2026.

What negative gearing is

A property is negatively geared when the cost of holding it — mortgage interest, council rates, insurance, maintenance, property management, depreciation — exceeds the rent it brings in. The shortfall is a loss.

Under the rules in place until 30 June 2027, that loss can be deducted against all of your income, including salary. An investor on the top marginal rate carrying a $15,000 annual shortfall reduces their taxable income by $15,000, so a substantial part of the loss is effectively funded by a reduced tax bill. That deduction against wage income is the mechanism the reform targets.

What changes from 1 July 2027

	Now, to 30 June 2027	From 1 July 2027
Rental losses	Deductible against any income, including salary	Deductible only against residential rental income or capital gains from residential property
Unused losses	Used in the year they arise	Carried forward to future residential rental income or gains
Capital gains	50% discount on assets held over 12 months	Cost base indexation, plus a 30% minimum tax on net capital gains

The restriction applies to established residential property acquired from 7.30pm AEST on 12 May 2026. Two important carve-outs sit alongside it.

Who is not affected

• Anything acquired before the cut-off. A property contracted before 7.30pm AEST on 12 May 2026 stays under the existing rules until it is sold. Existing portfolios are grandfathered rather than repriced.
• Eligible new builds. New construction remains exempt and keeps access to both negative gearing against all income and the 50% CGT discount. This is the deliberate steer in the policy: the incentive is being pointed at adding housing supply rather than at buying existing stock.

Indexation versus the 50% discount

The headline framing is that the CGT discount is being removed, but indexation is not nothing — and which rule treats you better genuinely depends on your circumstances.

Cost base indexation lifts your purchase cost in line with inflation, so you are taxed only on the real gain. Buy for $700,000, sell years later for $1,000,000 after cumulative inflation of 20%, and the indexed cost base is $840,000 — so the taxable gain is $160,000 rather than $300,000.

The comparison, roughly:

• Indexation favours long holds in higher-inflation periods, because the uplift compounds year after year.
• The 50% discount favours large gains over shorter periods, where prices have run well ahead of inflation.

A property that doubles in five years is generally better off under the old rule. One held twenty years through meaningful inflation may well not be. Layered on top is a 30% minimum tax on net capital gains, which sets a floor regardless of how the indexation lands.

What this does to the investment case

For an established property bought after the cut-off, the arithmetic changes in a specific way that is worth stating plainly: the shortfall no longer reduces your salary tax in the year you incur it. It becomes a carried-forward loss, useful only when the property produces rental income above costs or when you sell.

That has three practical consequences:

1. Cash flow matters far more than it did. A strategy built on holding a loss-making asset because the tax deduction softened it now has to fund the shortfall in full each year, from after-tax income.
2. Yield beats growth-at-any-cost in the early years. A property closer to neutral gearing is in a materially better position than one deeply negative, because the losses are otherwise stranded until sale.
3. The exit is where the loss is realised, which ties the benefit to eventually selling — and to the CGT rules in force at that point.

What to do now

1. Establish which side of the cut-off you are on. For anything already held, find the contract date — it determines your treatment indefinitely.
2. Model the shortfall unassisted. For a prospective purchase of established stock, run the annual cost with no salary offset at all. If it does not work on that basis, it does not work.
3. Price new builds separately. The exemption is a genuine difference in after-tax return, not a rounding item — but weigh it against the premium new stock usually carries and the risk profile of off-the-plan.
4. Get advice before any disposal. The interaction between grandfathering, the timing of a sale and the new CGT treatment is exactly the sort of thing worth paying for once.

Related

• Stamp duty by state — the largest single cost of buying, and it varies enormously.
• Renting versus buying in Australia — the underlying comparison, before any investment overlay.
• First home buyer schemes — the concessions available if this is your own home rather than an investment.
• Superannuation guarantee — the other major tax-advantaged route, and one these changes do not touch.

Sources

• Australian Taxation Office — Tax reform: boosting home ownership, reforming negative gearing and capital gains tax
• Australian Government — 2026-27 Budget, negative gearing and capital gains tax explainer
• Office of Impact Analysis — Capital Gains Tax and Negative Gearing

Measures announced in the 2026-27 Budget and scheduled to commence 1 July 2027; detail may change as legislation progresses. Compiled from public sources and not individually verified by a regulated adviser. General information, not financial or tax advice — take professional advice before acting.

Frequently asked questions

What is negative gearing?
A property is negatively geared when the costs of holding it — mortgage interest, rates, insurance, maintenance, depreciation — exceed the rent it earns. Under the rules in place until 30 June 2027, that loss can be deducted against salary and other income, reducing the investor’s overall tax bill.

Is negative gearing being abolished in Australia?
Not abolished, but restricted. Under changes announced in the May 2026 Budget, from 1 July 2027 losses on established residential properties acquired from 7.30pm AEST on 12 May 2026 can only be offset against residential rental income or capital gains from residential property — not against salary. Unused losses carry forward.

Does the change affect properties I already own?
Properties acquired before 7.30pm AEST on 12 May 2026 remain under the existing rules until they are sold. Eligible new builds are also exempt and keep access to both negative gearing and the 50% CGT discount.

What is replacing the 50% CGT discount?
From 1 July 2027 the 50% discount is to be replaced by cost base indexation, which lifts the purchase cost by inflation so only the real gain is taxed, together with a 30% minimum tax on net capital gains. Indexation applies to assets held more than 12 months.

Is indexation better or worse than the 50% discount?
It depends on how long you hold and how fast prices rise. Indexation favours long holds during higher inflation, because the uplift compounds. The 50% discount favours large gains over shorter periods. A property doubling in five years is generally better off under the old rule; one held twenty years through meaningful inflation may not be.