2026-27 Federal Budget: Complete Guide to Negative Gearing and CGT Changes

Introduction

For the first time since the late 1990s, the federal tax treatment of residential investment property is changing. The 2026-27 Federal Budget, delivered on 12 May 2026, announced two structural reforms taking effect from 1 July 2027: a restriction of negative gearing against wage income to new builds only, and a replacement of the 50% CGT discount with CPI indexation plus a 30% minimum tax on residential property gains.

The changes are narrower in practice than the headlines suggest. Anyone who already owned residential property at 7:30pm AEST on 12 May 2026 is fully grandfathered: their negative gearing entitlements continue exactly as before, indefinitely. New build investment is also fully preserved. The reform is targeted at one specific behaviour: buying established homes after the announcement and claiming the resulting tax losses against salary income.

This guide is the master reference for the reform. It explains exactly how the rules work, which investors are affected, the worked examples Treasury used in its budget papers, and the action items each category of investor should be considering before 1 July 2027.

What Was Announced on 12 May 2026

The Treasurer announced two related measures targeting residential investment property. Both commence on 1 July 2027. Both contain extensive transitional and grandfathering provisions designed to protect existing investors and to limit any short-term disruption to the rental market.

Measure 1 — Negative gearing restriction. From 1 July 2027, losses from residential investment property held by individuals can only be offset against residential property income (rent and capital gains on residential property), not against wage or salary income. There are two major carve-outs: new builds are fully exempt (full negative gearing retained), and grandfathered properties (held at 7:30pm 12 May 2026) are fully exempt.

Measure 2 — CGT reform. From 1 July 2027, the 50% CGT discount is replaced for residential investment property with CPI indexation of the cost base plus a 30% minimum tax on the inflation-adjusted gain. Only the portion of the capital gain that accrues after 1 July 2027 is affected — gains accrued before that date on existing assets continue to enjoy the 50% discount through transitional valuation rules.

Negative Gearing: The Three Investor Categories

To understand how negative gearing will work after 1 July 2027, you need to know which of three categories you fall into. Your category is determined entirely by when you acquired the property and whether it is a new build.

Category 1: Grandfathered (held at 7:30pm 12 May 2026)

If you owned the property — or had entered a binding contract to acquire it — at 7:30pm AEST on 12 May 2026, nothing changes. You retain the right to deduct net rental losses against your wage and salary income for the entire life of your ownership of that property. There is no time limit on this grandfathering. You can refinance, renovate, or change tenants without affecting the grandfathered status.

Category 2: Transitional (acquired 13 May 2026 – 30 June 2027)

If you buy an established residential property between the announcement and the commencement date, you can negatively gear against wages only until 30 June 2027. From 1 July 2027 onwards, any net losses on that property convert to carry-forward losses that can only be applied against future residential property income (rent or capital gains).

Category 3: Post-commencement (acquired on or after 1 July 2027)

If you buy an established residential property on or after 1 July 2027, you cannot offset net rental losses against wages at any time. Losses are quarantined as carry-forward losses, useable against future residential property income (including a future capital gain on sale).

See our companion articles for each category in detail: grandfathered properties, established property after 2027, and carry-forward losses explained.

CGT Reform: CPI Indexation + 30% Minimum Tax

The CGT reform is the more technically complex of the two measures, but its practical effect for most investors is surprisingly modest. The headline change — replacing the 50% discount with CPI indexation plus a 30% minimum tax — sounds dramatic. In practice, because only gains accruing after 1 July 2027 are affected, and because CPI indexation tends to offset a meaningful portion of the gain in low-inflation periods, most investors will see only a small change in their tax outcome.

Here is how the new method works for residential investment property sold after 1 July 2027:

1. The cost base is adjusted upwards by the cumulative CPI movement between acquisition (or 1 July 2027, whichever is later) and disposal.
2. The taxable gain equals sale price minus indexed cost base.
3. The marginal tax rate is applied to the gain — but a minimum effective tax rate of 30% applies, regardless of the investor's marginal rate.

Worked example: Michael (from the budget papers)

Michael owns a grandfathered property. He sells it two years after commencement for $560,000. The property's value at 1 July 2027 was $500,000. Cumulative CPI of 2.5% over two years lifts the indexed cost base portion attributable to post-July 2027 gains. After CPI indexation, the taxable gain is $34,688. Tax payable: $16,303. Under the old 50% discount method, tax would have been $14,100 — a difference of approximately $2,200.

For full worked examples and decision frameworks see CGT CPI indexation explained and sell before or after 1 July 2027.

The New Build Exception

The most strategically important feature of the reform is the new build exception. Properties that qualify as new builds retain full negative gearing rights forever — even if you acquired them on or after 1 July 2027. This is the Government's central policy lever for redirecting investor capital into supply-adding construction.

What qualifies as a new build:

• Off-the-plan apartments purchased from the developer
• Knockdown-rebuild projects that increase the dwelling count (e.g. a single house replaced with a duplex)
• Vacant land purchased and built on by the investor
• A property that is new (built within the last 12 months) and has not been occupied for more than 12 months before first sale

What does not qualify:

• Knockdown-rebuild of a single house replaced by another single house (no supply increase)
• A granny flat constructed on an existing non-qualifying property
• Any property that has been occupied for more than 12 months before purchase
• Second-hand purchases of new builds — only the first owner gets the concession

See new build rules in detail, off-the-plan apartments, and knockdown-rebuild rules.

Who Is Unaffected

A significant proportion of property holdings are entirely outside the scope of the reform. Understanding these exclusions is essential to avoid misreading the announcement.

Owner-occupiers (main residence)

The main residence remains fully exempt from CGT. There is no change to the main residence exemption. Owner-occupiers are simply not affected by either measure.

Superannuation funds (including SMSFs)

Super funds, including self-managed super funds, are excluded from the reform. Their existing arrangements continue unchanged. This was a deliberate design choice to avoid disrupting retirement savings.

Widely held trusts

Widely held trusts (typically large managed investment trusts and listed property trusts) are excluded. Their existing tax arrangements continue.

Commercial property and shares

The reform is targeted specifically at residential investment property. Commercial property and share investments retain the existing 50% CGT discount and unrestricted negative gearing.

For deeper analysis, see SMSFs, trusts and the 2027 changes.

Housing Market and Rental Impact

Treasury's modelling, released with the budget, projects modest aggregate effects on the housing market. The reform is designed to be calibrated rather than disruptive.

The relatively muted rental impact reflects three structural features of the reform: most existing landlords are grandfathered (so existing rentals are unaffected); carry-forward losses preserve the value of deductions over the long term (just deferred); and new build negative gearing continues to incentivise rental supply additions.

For the full analysis see rental market impact.

Action Checklist by Investor Type

If you already own investment property (grandfathered)

• Confirm your acquisition (or contract) date precedes 7:30pm AEST 12 May 2026.
• Document your grandfathered status in your tax records — keep contracts, settlement statements.
• Continue your existing negative gearing claims unchanged.
• Consider the CGT decision when selling — see sell timing analysis.

If you're considering buying before 1 July 2027

• Understand you'll get limited (1 year) negative gearing against wages.
• From 1 July 2027 your losses convert to carry-forward.
• Don't rush a purchase that doesn't otherwise stack up — see timing analysis.

If you're buying after 1 July 2027

• Strongly consider new builds for full negative gearing retention.
• For established property, model your strategy assuming losses carry forward only.
• The Yoonseo example shows the after-tax difference is small — focus on investment merit.

If you have property in an SMSF or trust

• SMSFs and widely held trusts are not affected.
• Discretionary trusts face a separate 30% minimum tax on distributions of investment income to adult beneficiaries.
• See SMSF and trust treatment.