The biggest tax story heading into the 2026 federal budget is the expected overhaul of negative gearing and the capital gains tax discount. The detail that matters most to the construction industry is one that most coverage is glossing over: new builds may stay exempt. That changes the demand picture significantly.
In February 2026, Treasurer Jim Chalmers confirmed that Treasury was modelling changes to both negative gearing and the capital gains tax discount. He has since described the status quo at the intersection of the housing market and the tax system as unfair and, as a result, unacceptable.
He has not ruled out changes. Neither has Prime Minister Albanese. That is a significant shift from Labor’s position before the 2025 election, when both ruled out touching either policy.
The measures expected to feature in tomorrow’s budget, based on Treasury modelling that has been widely reported across multiple outlets, are:
On negative gearing: a cap limiting deductions to a maximum of two investment properties per person. Losses on any additional properties would be quarantined, meaning they could only offset future rental income from those properties, not wages or other income. Both major parties have signalled that new construction would remain eligible for full negative gearing regardless of how many properties an investor owns.
On capital gains tax: a reduction in the discount from the current 50 percent to 33 percent for assets held longer than 12 months. Some reporting suggests the change may apply to all asset classes, not just property. Grandfathering provisions are expected to protect assets purchased before the budget date.
The distinction between new builds and established homes is not a detail. For builders, it may be the whole story.
Why the New Build Exemption Matters
The policy logic behind preserving tax concessions for new construction is straightforward. The government wants to discourage investors from competing with owner-occupiers for existing homes, while continuing to direct private capital toward new housing supply.
If the reforms land as expected, the tax treatment of buying a new build versus buying an established property changes materially.
Under a two-property negative gearing cap with a new build exemption, an investor with two existing properties could still negatively gear a new build on top of that, regardless of the cap. For a builder’s sales team, that is a concrete talking point. The tax advantage of buying new, relative to buying established, increases.
For investors who are already at or near the cap on existing properties, a new build becomes the only avenue to maintain negative gearing benefits. That redirects a portion of investor demand toward new construction, which is exactly where the housing supply shortage is most acute.
This does not mean a flood of investor demand for new homes materialises overnight. Investor decisions are driven by yield, capital growth expectations, location, and market conditions as much as tax settings. But at the margin, a more favourable tax treatment for new builds relative to established homes shifts the calculus.
What the Industry Has Said
The Housing Industry Association and Master Builders Australia have been direct about their concerns with the proposed reforms, regardless of any new build exemption.
HIA commissioned independent economic modelling from Qaive and Tulipwood Economics, which found that removing negative gearing with limited grandfathering would reduce new housing starts by approximately 46,000 dwellings over five years, cost more than 4,300 construction jobs per year, and reduce GDP by $2.3 billion. Removing the CGT discount under comparable conditions would cut housing supply by around 33,000 dwellings and cost more than 3,000 construction jobs.
HIA Managing Director Jocelyn Martin said whatever way you cut it, any time you do a tax hike on property, you reduce the supply of homes. Master Builders CEO Denita Wawn said the modelling findings were unequivocal.
The counterargument comes from the Grattan Institute, which projects a more modest impact: price reductions of one to two percent nationally with limited rental market disruption. The Senate Economics References Committee inquiry in March 2026 recommended cutting the CGT discount, arguing the current settings distort the housing market in favour of investors over owner-occupiers.
Both positions have legitimate grounding. The honest read is that the impact depends heavily on the specific design of the reforms, particularly the extent of grandfathering and whether new build exemptions are maintained. A targeted reform with strong new build protections looks different from a broad reform that catches all investment equally.
The modelling commissioned by the HIA found that even allowing negative gearing only for new builds, rather than removing it entirely, would still reduce dwelling starts by 22,750 over five years and cut economic activity by $1.6 billion.
The Rental Market Tension
There is a tension in this reform that the construction industry should understand clearly.
Around nine in ten rental homes in Australia are supplied by private investors, the majority of them small-scale individual landlords. The national residential vacancy rate is sitting at 1.1 percent, according to SQM Research data cited by HIA, with some capital city markets even tighter. Brisbane is at 0.8 percent, Perth at 0.6 percent, Adelaide and Hobart both at 0.5 percent.
In that environment, policy settings that discourage investment in rental property have a direct knock-on for rental supply. Fewer investors means fewer rental properties in the short term, which puts upward pressure on rents.
The government’s argument is that owner-occupiers eventually absorb some of that rental demand by entering home ownership, and that redirecting investor capital toward new builds rather than existing homes improves supply over the medium term. That argument has some merit. It also requires the new construction pipeline to actually deliver, at a time when Australia is already forecast to fall more than 220,000 homes short of the 1.2 million target.
These are not simple trade-offs. But they are the trade-offs that will be playing out in practice across builder sales enquiries, investor decisions, and market conditions over the next few years.
What This Means for Your Business
Three practical implications for builders, regardless of exactly how the reforms land tomorrow night.
First, understand the new build distinction and use it. If exemptions for new construction are confirmed, your sales team needs to understand the tax advantage clearly and be able to explain it to investors and buyers. This is not a complicated message: buying new remains tax-advantaged in ways that buying established may not.
Second, watch your investor enquiry mix. Builders who track where their sales leads come from will be able to see relatively quickly whether investor demand for new homes increases, decreases, or shifts in character after the budget. That data matters for forward planning.
Third, do not read the industry response as the final word. HIA and Master Builders are doing their job in pushing back hard on changes they believe will harm supply. That is appropriate. But the actual market response to these changes, once confirmed and implemented, will take time to reveal itself. Grandfathering provisions, the specific design of any new build exemptions, and broader market conditions will all shape outcomes that no pre-budget modelling can capture with precision.
The full picture arrives tomorrow night.
The 2026 federal budget is handed down tomorrow night, Tuesday 12 May, at 7:30pm AEST. For deeper conversations on the issues shaping the Australian construction industry, listen to the Good Builder Podcast wherever you get your podcasts.
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