The changes to negative gearing and capital gains tax (CGT) announced in the last federal budget have been met with vociferous attacks from both directions – for going too far and not going far enough – which the Albanese government has interpreted as meaning they’ve got the balance pretty much right. So how are these changes panning out for prospective homeowners?
Briefly, the old situation was that if an investor owned a rental property and it made a loss, they could deduct that loss against taxable income. There was also a flat 50 per cent discount on capital gains for individuals (introduced in 1999), which increased the financial benefit of using negative gearing as an investment strategy, particularly when properties were sold after they had increased in value, leading in turn to an accelerating market in investment properties as the residential market artificially ballooned, and a severe shortage of affordable housing.
Now (at least for established homes bought after 12 May 2026) property owners won’t be able to use a rental loss to reduce their other taxable income. In terms of capital gains, the old 50 per cent tax discount for individuals and trusts on assets held for more than twelve months will be replaced by inflation indexation of the asset’s cost base (less lucrative), with a minimum 30 per cent tax rate.
Lost in much of the noise around all this has been the fact that the modification to negative gearing will only affect established homes purchased since budget night, not newly built homes or existing investments (which will be ‘grandfathered’), and most substantial changes will not kick in until July 2027.
With housing prices spiralling out of reach for many Australians, the government has argued that these changes will address a basic social need by encouraging investment in new housing. They say the new approach makes the tax system more equitable, while protecting investors who have made financial plans based on the old system.
Critics have suggested that negative gearing and CGT were never the main cause of the housing crisis, and the government should instead be focusing on supply constraints, population growth, planning rules and interest rates.
Mega or minor?
In May, Treasurer Jim Chalmers pitched Labor’s changes to negative gearing and CGT as part of ‘the most important and ambitious budget in decades,’ but his own department’s modelling has been far more modest.
They expect house price growth in Australia to slow by maybe two per cent in the next two years, with a boost to the number of residential owner-occupiers (as opposed to investors) of around 75,000 over the next ten years – all with a negligible effect on rents.
Other experts anticipate a bigger price effect than Treasury. Because negatively-geared investor loans for existing properties account for an estimated 20 per cent of all new home loans, some analysts think prices could fall by as much as nine per cent, with a slowing of credit growth. This would help buyers in terms of entry price, but it’s a much sharper adjustment than the government is modelling.
Commbank says that while the reforms will reduce investor competition with first-home buyers in the established residential real estate market, overall turnover is likely to fall, with grandfathered investors now having a stronger incentive to maintain their assets under the old tax treatment, rather than sell them. Fewer listings will maintain existing high prices.
It’s yet to be seen how the construction/rental supply question is going to play out. If redirecting investors into new builds genuinely lifts construction, then supply and rents will stay roughly neutral. If the tax changes thin out the availability of established rental properties, then renters (many of them future first home buyers) will be worse off, at least in the short term.
Mortgage brokers and property analysts are reporting that some investors are already delaying or cancelling purchases of established homes because the tax advantages will be reduced after July 2027.
Overheated real estate markets around the country, including Sydney, are currently seeing softer prices, but interest rates, economic conditions and consumer confidence are also playing a role in that. Anecdotally, things have cooled somewhat in the Northern Rivers, with auctions becoming less competitive and smaller deposits being required than in the recent past.
With so much doubt flying around what’s going to happen next, it’s worth having a look at what happened when governments previously tinkered with CGT and negative gearing. How did that work out?
Long ago in a distant galaxy
Once upon a time, Australia had no general capital gains tax. In 1985, ignoring howls of protest, Treasurer Paul Keating brought one in, and indexed the purchase price to inflation (much like Jim Chalmers in 2026).
Also in 1985, Bob Hawke and his treasurer changed the treatment of negative gearing (in much the same way as the recent changes under Chalmers) but reversed course after two years, following heavy lobbying from moneyed interests. There’s no clear evidence that any of this increased housing supply.
John Howard’s government kept the existing negative gearing situation, but altered the capital gains tax regime in 1999 to make property much more attractive as an investment. This resulted in some people becoming extremely wealthy from multiple housing investments (including members of parliament from all parties, it must be said), while a great many others were locked out of the housing market altogether.
Labor’s critics in 2026, such as the Australian Property Institute (who note the country’s residential property market is worth a staggering $12 trillion), say there’s no consensus that home buyers will be better off under the latest changes, and claim that renters will definitely be worse off.
In a recent statement, API described the negative gearing reform as the most widely cited downward pressure on residential prices, even more than the capital gains tax reform and the outlook on interest rates. They say the shortage of housing supply remains a massive problem that the government is failing to address.
State by state, API members say the situation for property investors is most grim in Victoria and NSW. Clearly not everyone can win from lowered residential property prices, even if that’s one of the outcomes the government is seeking.
The Coalition says the changes to negative gearing and capital gains tax are creating uncertainty, won’t deliver desired outcomes in terms of housing and represent a broken election commitment from the ALP. They say taxpayers on lower marginal tax rates – including some retirees – will pay more tax on capital gains than they would have under the previous system, disrupting retirement strategies, and have pledged to overturn the changes, if and when they are returned to government.
Those on the opposite side of the political spectrum have argued that the government’s reforms are far too modest and slow.
The truth is that no one quite knows exactly how the latest changes to negative gearing and capital gains tax are going to pan out, but many people are relieved that at least Anthony Albanese and Jim Chalmers are doing something, anything, to deal with the ongoing housing crisis.
After all, housing is supposed to be a human right, not just an investment.
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