In the 2026-27 Federal Budget handed down on 12 May 2026, the most significant proposed housing tax reforms were changes to negative gearing and capital gains tax (CGT).
Proposed Negative Gearing Changes
The Budget proposed that, from 1 July 2027:
- Negative gearing would be limited to newly constructed residential properties.
- Investors purchasing existing (established) residential properties after the commencement date would no longer be able to offset rental losses against salary and wage income.
- Existing property investors would generally be grandfathered, meaning investments acquired before the commencement date would retain the current tax treatment.
Government’s Stated Objective
The Government’s rationale was to:
- Redirect investor demand from established homes to new housing supply.
- Improve housing affordability for first-home buyers.
- Increase construction of new dwellings.
- Reduce tax concessions viewed as disproportionately benefiting higher-income investors.
What is Negative Gearing?
- Negative gearing occurs when the costs of owning an investment property exceed the rental income generated from that property. Under Australian tax law, the resulting loss can generally be offset against the investor’s other taxable income, reducing their overall tax liability.
For example:
Salary income = $120,000
Rental loss = $15,000
Taxable income becomes $105,000
The investor still makes a cash loss, but receives a tax benefit that partially offsets that loss.
Recent Budget Changes
The Federal Government’s 2026-27 Budget announced significant reforms to both negative gearing and capital gains tax. The Government has legislated reforms that will:
- Limit negative gearing for residential property investments to new housing builds from 1 July 2027.
- Replace the traditional 50% CGT discount for individuals, trusts and partnerships with an inflation-indexation approach combined with a minimum 30% tax rate on capital gains.
Key Historical Comparison
The proposal differs from the 1985 Hawke/Keating changes because it is designed to:
- Preserve negative gearing for new housing,
- Encourage construction,
- Avoid a sudden withdrawal of investment from the rental market.
The key takeaway is that the 2026 Budget’s housing reforms are not a complete abolition of negative gearing. They represent a targeted shift of tax incentives away from established housing and towards new housing construction, with the aim of improving affordability while protecting rental supply.
Negative gearing has been part of Australia’s tax system for decades and has only been removed once, between July 1985 and September 1987 under the Hawke Labor Government, with Paul Keating serving as Treasurer. The policy was subsequently restored by the same government after concerns about rental housing supply.
The historical evidence suggests that removing or restricting negative gearing would likely have mixed effects, with consequences differing for homeowners, first-home buyers, renters and investors.
Historical Origins of Negative Gearing
The ability to deduct investment losses against other income has existed in Australian tax law since the Income Tax Assessment Act 1936. It was not originally designed specifically for housing but formed part of the broader principle that expenses incurred in earning assessable income are tax deductible.
Over time, property investors increasingly used these provisions to build wealth through leveraged property investment.
Which Government Removed Negative Gearing?
In July 1985, the Hawke Labor Government effectively quarantined negative gearing losses from rental properties. Investors could no longer use rental property losses to reduce salary and wage income. Instead, losses could only be carried forward and offset against future rental income or capital gains.
The objective was to reduce tax avoidance opportunities and improve the fairness of the tax system.
What Was the Historical Impact of Removing Negative Gearing?
This remains one of the most hotly debated topics in Australian housing policy.
Argument 1: Removal Increased Rents
Property industry groups and many economists argue that:
- Investors exited the rental market.
- New rental property construction slowed.
- Rental supply tightened.
- Rents rose sharply in Sydney and Perth.
Even Prime Minister Bob Hawke acknowledged rental market pressures, particularly in Sydney.
Treasurer Paul Keating later stated that restoring the deductions would improve investment in residential rental accommodation and increase supply.
Argument 2: The Evidence Was Mixed
Subsequent analysis has challenged the claim that abolishing negative gearing caused a nationwide rental crisis.
Other findings state:
- Significant rent increases occurred primarily in Sydney and Perth.
- Other major cities experienced little or no unusual rental inflation.
- Extremely low vacancy rates and other market factors also contributed.
- National rental trends did not show a broad surge attributable solely to negative gearing changes.
Many economists point out that:
- Sydney and Perth already had very tight rental markets.
- Interest rates were high.
- Population growth was strong.
- Housing supply was constrained.
These factors may have been far more important than tax policy alone.
When Was Negative Gearing Restored?
In September 1987, the Hawke Government reversed its earlier decision and restored the ability for investors to deduct rental property losses against other income.
Ironically, the same government that removed the concession later reinstated it.
Keating argued that restoration would:
- Promote investment in rental housing.
- Improve rental accommodation supply.
- Restore consistency between property and other investment classes.
The rules have largely remained in place ever since.
Many economists argue that the interaction between negative gearing and the CGT discount has had a greater impact on investor demand than negative gearing alone.
Proposed Negative Gearing Changes
Commencement Date: 1 July 2027.
Current Rules
Under the current system, investors can:
- Purchase a residential investment property.
- Claim rental losses against salary and wage income.
- Reduce their overall taxable income.
- Benefit from the 50% capital gains tax discount when the property is sold after 12 months.
Proposed New Rules
- Negative gearing will continue for newly constructed residential properties.
- Negative gearing will no longer be available for newly acquired established residential properties.
- Existing investors are expected to be grandfathered, preserving current tax arrangements for properties already owned before the commencement date.
Capital Gains Tax Changes
The Budget also proposes changes to Capital Gains Tax (CGT):
- The current 50% CGT discount would be removed.
- An inflation-based indexation system would replace the discount.
- The aim is to reduce tax-driven speculation and align taxation more closely with real investment gains.
This change is important because negative gearing and the CGT discount have historically worked together as a combined investment strategy.
Likely Winners and Losers
Winners
First Home Buyers
Likely to benefit from:
- Less competition from investors.
- Improved affordability of established homes.
- Greater access to government support programs.
New Housing Construction Sector
Likely to benefit from:
- Increased investor demand for new dwellings.
- Stronger project feasibility.
- Higher development activity.
Potential Losers
Investors in Existing Housing
Likely to experience:
- Reduced tax advantages.
- Lower after-tax returns.
- Reduced attractiveness of highly leveraged property strategies.
Existing Homeowners
Potentially slower capital growth due to reduced investor demand for established housing.
Impact on Renters
The impact is likely to be mixed.
Potential Positive Outcome, If the reforms stimulate significant new housing construction:
- Rental supply could increase.
- Rental growth could moderate over time.
- Potential Negative Outcome
Potential Negative Outcome, If investor activity declines faster than new supply is delivered:
- Vacancy rates could tighten.
- Rental pressures could increase in some markets.
Summary
The 2026-27 Federal Budget does not abolish negative gearing. Instead, it restructures the concession to favour investment in new housing construction rather than existing homes. Combined with changes to the CGT regime, the reforms are intended to shift capital towards increasing housing supply, improve affordability for first-home buyers, and reduce reliance on tax-driven property investment strategies. The success of the reforms will largely depend on whether they generate sufficient new housing supply to offset any reduction in investor demand for established residential property.
Should you require further information on Negative Gearing in Australia, please feel free to contact Peter Quinn by submitting an enquiry or by calling us on +61 2 9580 9166.
The information in this document does not take into account your personal objectives, financial situation, or needs, so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser