Negative Gearing and CGT Reforms: What the 2026 Federal Budget Means for Property Investors, Families and Estates
The 2026-27 Federal Budget, handed down on 12 May 2026, introduced major changes to Australia’s property investment tax settings. These reforms to negative gearing and the Capital Gains Tax (CGT) discount aim to improve housing affordability by encouraging investment in new housing supply while reducing incentives for established properties. The changes have significant implications for property investors, family law settlements, estate planning, and wealth structuring.
What is Negative Gearing?
Negative gearing occurs when the ongoing costs of owning an investment property; such as, loan interest, council rates, maintenance, insurance, and property management fees - exceed the rental income generated. This creates a net rental loss.
Previously, investors could deduct this loss against their other income (e.g., salary or business earnings), reducing their overall taxable income and tax bill. This tax benefit, combined with potential long-term capital growth, made negatively geared property a popular strategy.
Key Changes (Effective 1 July 2027):
Negative gearing on established residential properties acquired after Budget night (12 May 2026) is restricted. Losses can only be offset against other residential rental income or residential capital gains (with carry-forward).
New builds remain fully negatively geared.
Grandfathering applies to properties held before the announcement so arrangements for negative gearing before 12 May 2026 will remain in place.
What is Capital Gains Tax (CGT) and How Has It Changed?
CGT is the tax payable on the profit (capital gain) made when you sell an asset, such as an investment property, shares, or business interests. The gain is generally calculated as the sale price minus the original cost base (purchase price plus certain costs like stamp duty and improvements).
Previously (pre-1 July 2027 gains): Individuals, trusts, and partnerships received a 50% CGT discount on assets held for more than 12 months. For example:
You bought an investment property for $600,000 and sold it for $1,000,000 after 2 years (gain of $400,000).
With the 50% discount, only $200,000 of the gain was taxable, added to your marginal income tax rate. This significantly reduced the effective tax on long-term property growth.
New Rules (gains accruing from 1 July 2027): The 50% discount is replaced with cost base indexation (adjusting the purchase price for inflation via CPI) and a 30% minimum tax rate on net capital gains for assets held over 12 months. The changes apply only to post-1 July 2027 gains so earlier gains retain the old discount. New builds may have some concessional options.
Important Note on Principal Place of Residence (PPR): Your family home (principal place of residence) remains fully exempt from CGT, provided it meets the eligibility criteria (primarily used as your home, on land less than 2 hectares, etc.). This exemption is unchanged by the reforms.
Market Commentary and Expected Impacts
Early reactions show softening investor demand for established properties, with some auction clearance rates easing and first-home buyers gaining a stronger foothold, particularly on the Gold Coast and in Brisbane. Analysts expect a modest slowdown in price growth (around 2% less than otherwise over the next couple of years) rather than a crash, while new build incentives may help long-term supply.
Sales Activity: We are likely to see mixed behaviour with some investors offloading established properties (especially highly geared ones) to reposition into new builds or other assets, while many will hold grandfathered properties to retain existing tax benefits. Overall, this could lead to more sales in the short-to-medium term as portfolios adjust, but not a flood.
Home Owners vs Interstate Investors: Local Queensland home buyers and owner-occupiers may now face less competition from highly geared investors from Sydney and Melbourne who previously dominated segments of the market with multiple properties. This could give first-home buyers and upsizing families a better look at desirable properties without being outbid by tax-advantaged portfolios.
Practical Implications for Our Clients
Family Law and Property Settlements: These changes add complexity to asset division. CGT now affects investment properties, shares, businesses, and trusts more significantly in future realisations. In settlements, parties must model post-reform tax liabilities accurately because outdated assumptions can lead to unfair outcomes. Business interests (e.g., companies or trusts holding property) may see altered valuations and division strategies. We strongly recommend updated valuations and tax advice.
Estate Planning and Trusts: Indexation and the 30% minimum tax may change liabilities on death, transfers, or distributions. Grandfathered negatively geared properties provide some stability for blended families and testamentary trusts.
Investment Strategy: New builds are now more attractive tax-wise. Timing acquisitions, debt structuring, and entity choice are critical. Business owners should review how CGT changes impact company or trust-held assets.
Our Advice
These reforms do not end property investment in Australia because our strong fundamentals, including world-class healthcare, education, Centrelink supports, and lifestyle, continue to drive long-term demand. However, they require a strategic reset.
At Kilmartin Legal, we work with accountants, financial advisers, and valuers to help clients navigate these changes in family law, property settlements, and estate planning. Early advice is essential.