What the proposed tax changes will actually mean for property investors
The proposed changes to capital gains tax (CGT) and negative gearing ahead of the May 12th Federal Budget have sent property investors into a spin. While headlines are loud, the reality is far more nuanced than it may seem. Here’s what’s actually on the table, and what it could mean for the property market.
What is negative gearing?
Negative gearing is a tax incentive that allows investors to deduct losses on an investment property against their other income, such as their salary.
Every investment property comes with costs: mortgage interest, property management fees, body corporate fees, insurance, maintenance and council rates, to name a few. When those total costs exceed the rental income the property earns, the shortfall can be offset against your taxable income, reducing the tax you pay. The higher your marginal tax rate, the greater the benefit.
Many investors actively pursue this strategy when buying in markets with lower rental yields but stronger capital growth prospects. The logic is that the long-term capital gain will more than offset the short-term cash flow losses, and in most cases rents rise over time until the property eventually becomes positively geared on its own.
What changes are actually being proposed with Capital Gains Tax (CGT) and negative gearing?
On the CGT side, the current 50% discount applies to individuals who have held an asset for more than 12 months. The proposed change would reduce that discount to either 33% or 25%, effectively increasing the tax bill for investors who sell. There has also been strong indication from the AFR that the government may leave CGT discounts intact for brand new properties, a distinction that, if accurate, changes things considerably. We’ll come back to that.
On negative gearing specifically, the most discussed proposal is a cap of two investment properties per person. Investors would then lose the ability to offset losses against their income for the third property and any additional investment properties.
According to Parliamentary Budget Office analysis, that affects approximately 9.5% of all property investors in Australia, meaning the vast majority would not be impacted at all. It’s also worth noting that changes of this nature are almost always grandfathered, meaning properties already owned before any start date retain their existing tax treatment. New rules would only apply to future purchases.
The logic sounds reasonable. The reality is more complicated.
Yes, in theory, fewer investors means less competition at auctions. But here’s what that argument misses: a healthy property market needs investors, not as a luxury but as a necessity. Australia is already significantly undersupplied across most markets. The country is forecast to fall roughly 30% short of its housing supply targets over the next two years, representing a shortfall of close to 200,000 homes. That gap, driven by population growth, slow planning approvals, high construction costs and a shortage of skilled trades, is the single biggest driver of price growth and rental stress.
Investors, particularly those buying new properties, play a direct role in making new developments viable. Developers need pre-sales to secure finance. Without investor demand, projects don’t get off the ground, which means fewer homes built, which means less supply. Less supply puts upward pressure on both prices and rents.
Remove investors from the equation and you’re not just reducing competition for existing homes. You’re slowing down the pipeline of new ones. The very problem the policy is trying to fix gets worse.
There’s another flaw in the CGT argument
Capital gains tax is only payable when you sell, and many experienced investors never intend to, or at least not most of their portfolio. Savvy investors often try to build a portfolio of up to five or six properties over their working life. By retirement, they might sell one to pay down debt, triggering some CGT, and then live off the rental income from the rest. Those remaining properties can then be retained. They’re held to fund lifestyle in retirement, with rents rising over time to keep pace with the cost of living, and eventually passed on.
This is where property’s key long-term advantage comes into focus. Property and shares are inflation-proof assets. As the cost of living rises, rents tend to rise with them. For the millions of Australians who won’t retire with a superannuation balance large enough to fund a comfortable lifestyle, income-producing property is one of the most practical and effective tools available.
For those investors, the CGT discount is largely irrelevant because they’re not selling, which means the proposed changes may have far less impact on investor behaviour than the government is banking on, while still carrying real risks on the supply side.
The rental market can’t afford to lose supply
It’s important to remember that housing affordability isn’t just a buyer problem. It’s a renter problem too. Nearly a third of Australians rent their home, and there are very real reasons why. Some haven’t saved a deposit yet. Some have moved interstate and want flexibility before committing. Some are going through a separation and need somewhere to land quickly. The rental market exists because it needs to exist, and if there isn’t enough supply, rents go up, hitting hardest those who are already stretched.
Vacancy rates nationally are sitting at around 1.1%, well below the 3% considered a healthy market, and rental affordability hit a record low in the March 2026 quarter. In that environment, anything that reduces the pool of available rentals doesn’t help people at the bottom of the market. It makes their situation harder. The government’s own goal of improving housing accessibility risks being undermined by the very policy it’s putting forward.
The one move that would actually make a difference
The tax debate is largely political. The real issue, the one that would genuinely move the needle on housing affordability, is supply.
Australia needs to build more homes, and that starts with addressing the practical barriers. Planning and approval processes remain painfully slow, land supply is constrained, and new development needs to be actively encouraged.
There’s also a need to embrace more innovative construction methods and attract skilled tradespeople, whether through targeted migration programs or stronger training incentives.
The property markets with the least price growth in Australia are consistently those with the most supply. That’s not a coincidence. No tax change builds a house. Only construction does.
What does this mean for new property specifically?
If the AFR reporting is accurate and CGT discounts are preserved for brand new properties, that’s both a smart move and an important signal. New property investment is exactly what Australia needs more of right now. Investors buying off-the-plan and newly built homes directly support the development pipeline, add to rental supply, and help close the gap between what’s being built and what the country needs.
From an investment perspective, new property has always offered strong fundamentals: better depreciation schedules, lower maintenance costs and stronger rental appeal. If the tax settings remain intact for new builds, those fundamentals are only strengthened.
What does this mean for you as an investor?
If you own one or two investment properties, or are considering your first or second, the proposed negative gearing cap doesn’t affect you at all. That point consistently gets lost in the noise. If you hold three or more properties, the grandfathering principle is worth keeping in mind. Based on every credible proposal currently on the table and the historical precedent from the 2019 election, properties purchased before any change takes effect are expected to retain their existing tax treatment. The May 12th budget is the next key date to watch, but regardless of what’s announced, the fundamentals of sound property investment don’t change.
A well-chosen property in the right location, with genuine rental demand and long-term growth drivers, will continue to perform. That has always been true, and it remains true now.
Key takeaways
The debate around negative gearing and CGT reform is real, but the framing in much of the media misses the bigger picture. Reducing investor incentives without addressing the underlying supply shortage risks making housing less affordable, not more, particularly for renters who are already bearing the brunt of a severely under-supplied market. The most constructive path forward is a focused effort on increasing new housing supply: faster approvals, better incentives for development, and practical solutions for the construction workforce.
For most investors, the proposed changes are more manageable than the headlines suggest. Understanding what’s actually on the table and planning accordingly is the most important thing you can do right now.
Want to talk through what the proposed changes could mean for your investment strategy? Chat to us today.
