The proposed budget changes include two major reforms for investors: restrictions on negative gearing for residential property investors and changes to the capital gains tax rules.

These measures are expected to apply from 1 July 2027, although some transitional rules will apply.

Negative gearing limited to new builds

From 1 July 2027, negative gearing for residential property is proposed to be limited to new builds.

This means investors will generally only be able to offset rental losses against other income where the property genuinely adds to housing supply. Examples include converting one dwelling into two, or building a new dwelling on vacant land.

A knockdown rebuild that doesn’t increase the number of houses will not count as a new build.

To qualify, the property must not have been previously sold, unless it was first owned by the builder and was not occupied for more than 12 months.

Existing and near-term purchases

The proposed rules include important transitional arrangements.

Properties under contract before budget night are expected to be exempt and can continue to be negatively geared until sold. Properties purchased after budget night can still be negatively geared, but for losses incurred before 30 June 2027.

Commercial property, shares and other asset classes are not affected by this measure. Superannuation Funds are also exempt.

What happens to disallowed rental losses?

Where negative gearing losses are impacted, they will not disappear. Instead, they can only be used to reduce rental income or capital gains from rental properties.

Any excess loss will be carried forward until it can be used. This means investors will still need to prepare full rental property schedules each year, even though the loss cannot be used immediately against salary or business income.

Capital gains tax changes

There is no proposed change to CGT until 1 July 2027.

For assets acquired after 1 July 2027, the cost base will be calculated using indexation where the asset is held for more than 12 months. A minimum tax rate of 30% will apply to net capital gains calculated under this method. The 30% minimum tax will not apply to recipients of the age pension or some other income tested support payments.

Indexation may be more favourable where the asset has only increased broadly in line with inflation. It may be less favourable where the asset has achieved stronger growth. In many cases, where returns exceed inflation by a reasonable margin, taxpayers may be worse off compared with the current 50% CGT discount.

For assets acquired before 1 July 2027, the gain will be split into two parts:

The gain up to 1 July 2027, where held longer than 12 months, will be calculated using the existing 50% discount method
The gain after 1 July 2027, where held longer than 12 months would be calculated using indexation with a 30% minimum tax rate

Taxpayers will either need a valuation at 1 July 2027 or use an ATO tool expected to be provided to estimate the value.

Pre-CGT assets acquired before 1985 are also proposed to enter the CGT regime for future gains. Gains up to 1 July 2027 will remain exempt, but gains after that date will be subject to the new indexation and minimum tax rules.

Special rule for new builds

Investors in new residential builds will have the choice of applying either the existing 50% discount method or the new indexation plus minimum 30% tax method.

Planning points for investors

Investors should review their portfolios before 1 July 2027. Key questions include:

• Are any current properties under contract before the relevant cut-off date?
• Will future purchases qualify as new builds?
• What is the expected impact of carrying forward rental losses?
• Should valuations be obtained at 1 July 2027?
• How will the CGT changes affect long-held assets, including pre-CGT assets?
• Where investments are held in trusts, what is the impact of the proposed minimum trust distribution tax (Click here to see our blog on this topic)

These changes could materially affect after-tax returns, so investors should seek advice before buying, selling or restructuring property holdings.