The federal government has announced the most significant changes to property investment tax in more than 25 years. For builders, developers and anyone working in residential construction, the detail matters more than the headlines.

On budget night, the federal government announced two reforms to how residential property investment is taxed in Australia. Negative gearing will be limited to new builds only from 1 July 2027. The 50 per cent capital gains tax discount will be replaced with a CPI-based indexation system and a 30 per cent minimum tax on capital gains from the same date.

These are significant changes. Not because they have never been discussed before, but because this time they are legislated policy with transition dates. For anyone in residential construction, the implications flow in multiple directions.

What Is Negative Gearing, and Why Does the Change Matter

Negative gearing exists when the costs of owning an investment property, principally mortgage interest, exceed the rental income it generates. Under current law, that loss can be deducted against other taxable income, including wages. For a high-income earner, that deduction reduces their tax bill by an amount proportional to their marginal tax rate.

In 2022-23, around 230,000 individuals acquired negatively geared investment properties. That is roughly one per cent of all tax filers. But the behaviour this tax arrangement has encouraged across the broader investor market has had a material effect on property prices and supply mix over time.

83 per cent of new investor loans in 2025 were for existing property, not new construction. That figure sits at the centre of the government’s argument for this reform. The tax system has, in their view, been channelling investor capital toward established housing stock rather than new builds. Changing the tax treatment is designed to redirect that capital.

From 1 July 2027, losses from existing residential investment properties purchased after budget night (7:30pm AEST 12 May 2026) can only be deducted against other residential property income, not against wages or other income. Those excess losses can be carried forward and applied against future property income or capital gains when the asset is sold. They are not lost. They are deferred.

New builds remain fully negatively gearable before and after 1 July 2027. That is the core mechanism of the policy. The tax concession for rental losses is being preserved for new construction and removed for established property.

New builds remain fully negatively gearable before and after 1 July 2027. The tax concession is being preserved for new construction and removed for established property.

What Counts as a New Build

The definition matters enormously for builders and developers, and the government has been specific.

Eligible new builds include: newly constructed dwellings built on vacant land; a duplex or multiple dwellings constructed through a knock-down rebuild where the number of dwellings on the site increases; off-the-plan apartments; and any residential construction on previously vacant land.

Not eligible: a knock-down rebuild that replaces one house with one house. A granny flat added to an established property that is not itself eligible. A newly built property that has been occupied by the builder for more than 12 months before first sale. Extensions or substantial renovations that do not add to the number of dwellings.

The eligibility test is whether the build genuinely adds to housing supply. The policy is not a blanket incentive for new construction activity. It is specifically targeted at net new dwellings.

For volume builders working in land estates, this is largely business as usual. For custom builders doing one-for-one replacements on established sites, the new build exemption will not apply to the investor purchasing the finished product. That is worth communicating clearly to clients who may assume a brand new house automatically qualifies.

Subsequent purchasers of a new build property also cannot access the negative gearing concession or the old 50 per cent CGT discount. Once the property is on-sold by the original investor, it becomes an established property for tax purposes. This mirrors how some state-based stamp duty exemptions work.

Capital Gains Tax: How the Numbers Actually Work

The CGT change replaces the flat 50 per cent discount on capital gains with two mechanisms: CPI-based indexation to strip inflation out of the gain, and a minimum 30 per cent tax rate on whatever taxable gain remains.

Under the old system, if you bought a property and sold it for a gain of $300,000, you paid tax on $150,000 regardless of how much of that gain was inflation and how much was a real return. The 50 per cent discount was a blunt approximation.

Under the new system, you calculate how much of the gain is attributable to inflation using the CPI, and only pay tax on the real gain above that. For long-held assets or assets held during periods of high inflation, this can actually reduce the taxable amount. For assets held during periods of strong real price growth, it will increase it.

The government’s own modelling illustrates this clearly. Looking at residential property over the past 20 years, if indexation had applied instead of the 50 per cent discount, the effective discount on the nominal gain would have ranged from 35 to 60 per cent depending on the holding period and the rate of price growth. That is a broader range than the fixed 50 per cent, meaning the reform helps some investors and hurts others depending on their specific returns.

For a property with average capital growth of 5.8 per cent per year held for five years, the government models an effective tax rate on the nominal gain of 18.6 per cent at a 32 cent marginal rate and 27.3 per cent at the 47 cent top rate. For investors with strong returns above inflation, the new system will typically result in higher tax. For those with modest returns close to the inflation rate, it may result in lower tax.

The 30 per cent minimum tax applies on top of the indexation calculation. It ensures that investors who realise capital gains in low-income years, for example, in retirement when they have little other income, cannot pay an effective tax rate on those gains below 30 per cent. Age pensioners and those receiving income support payments in the year of sale are exempted from the minimum tax.

For investors with strong returns above inflation, the new system will typically result in higher tax. For those with modest returns close to the inflation rate, it may result in lower tax. The reform helps some and hurts others depending on their specific returns.

Transitional Arrangements: What Is Protected and What Is Not

The government has designed careful transition rules that reduce the risk of market disruption. Understanding them matters for anyone advising clients or planning projects.

For negative gearing on existing properties: any property held at the time of the budget announcement (including properties under contract but not yet settled) retains the full current negative gearing treatment until it is sold. Those investors are completely protected.

For existing properties purchased between announcement date and 30 June 2027: the property can be negatively geared under current rules during that period but not from 1 July 2027 onward.

For existing properties purchased from 1 July 2027: losses can only be offset against other residential property income and carried forward.

For capital gains: the 50 per cent discount applies to all gains accrued before 1 July 2027 on existing assets. The new indexation and minimum tax only apply to gains accrued from that date. The ATO will provide tools to help taxpayers calculate the asset’s value at the policy commencement date, either through a valuation or a formula-based apportionment.

Pre-1985 assets retain their existing CGT exemption for gains accrued before 1 July 2027. The main residence exemption is completely unchanged. The four small business CGT concessions are unchanged.

Investors in new builds get the most favourable treatment. They can choose between the 50 per cent discount or the new indexation and minimum tax arrangements when they sell, selecting whichever is more beneficial for their circumstances.

What This Means for Builders and the New Build Pipeline

The construction industry’s interest in this reform is not primarily about tax. It is about demand.

The government’s modelling suggests the reforms will support around 75,000 additional owner-occupiers over the next decade. That represents an increase in the owner-occupier share of the housing market equivalent to reversing around ten years of decline. Whether that modelling proves accurate depends on how investor behaviour actually changes.

The more direct effect is the potential shift in investor capital toward new builds. If the tax concession for rental losses is now exclusively available for new construction, the rational move for any investor still seeking a negatively geared property is to buy new. That creates a direct incentive for investors to enter the new build market who might previously have bought established stock.

Whether that translates into a material increase in new build demand depends on how sensitive investors are to the tax change relative to other factors like location, yield expectations, construction timelines and price. These are legitimate uncertainties. But the directional effect of the policy is clear: it tilts investor activity toward new construction.

For volume builders with established pipelines and strong investor sales channels, this is a tailwind. For builders whose work sits predominantly in knock-down rebuild on existing footprints, the eligibility definition for new builds requires attention. A one-for-one replacement does not qualify, which means the buyer of that finished home cannot negatively gear it. That changes the investor value proposition for that product type.

For developers of medium density housing, off-the-plan apartments and greenfield estates, the reform aligns directly with their product. The negative gearing concession and the choice of CGT treatment are both preserved for eligible new builds. That is a meaningful selling point for the investor segment of their market.

The expected impact on rents is modest. The government’s modelling puts the increase at less than $2 per week for a household paying median rent, with the combination of supply measures expected to exert downward pressure over time. Builders should be aware of this figure because clients and commentators will cite rental impact arguments in both directions. The government’s own number is small.

The expected impact on house price growth is a 2 per cent reduction in price growth over a couple of years relative to a no-change scenario. The government describes this as small and temporary. The industry will watch this closely given the effect of price expectations on both developer feasibility and consumer confidence.

What Has Not Changed

The main residence exemption is unchanged. Owner-occupiers are not affected by any of these reforms.

Commercial property and other asset classes including shares remain subject to existing negative gearing arrangements. The changes are exclusively to residential investment property.

The four small business CGT concessions are unchanged.

The 60 per cent CGT discount for qualifying affordable housing investments is retained in full.

Widely held managed investment trusts and superannuation funds including SMSFs are excluded from the negative gearing changes.

Companies investing in residential property are subject to the negative gearing changes, but companies pay a flat 30 per cent tax rate on income and are not eligible for the CGT discount in any case, so the CGT changes have limited practical impact at the company level.

These reforms are the most substantial change to property investment tax settings since the 50 per cent CGT discount was introduced in 1999. They are designed, in the government’s own framing, to rebalance capital flows from existing housing stock toward new construction.

For builders and developers, the policy direction is broadly favourable for new build demand. The qualifying conditions are specific. The transitional arrangements are carefully designed. And the full effect on investor behaviour will not be visible until 1 July 2027 and beyond.

The builders who will navigate this best are the ones who understand the rules clearly enough to explain them accurately to clients, investors and partners who are trying to work out what it means for their next decision.

That is not a political position. It is a practical one.

General Information Disclaimer:
This article is based on the federal Budget 2026-27 tax explainer document and is provided as editorial commentary for industry professionals. It does not constitute financial, tax or legal advice. Individual tax circumstances vary. Builders, investors and business owners should seek qualified professional advice before making decisions based on these policy changes.

Author: TGB Editorial