Negative Gearing and CGT Reform 2027: What's Actually Changing

What the budget actually delivered on 12 May 2026 is a two-part legislative package that rewrites the after-tax return on established residential property investment from 1 July 2027. Negative gearing changes 2027 is the search term everyone is Googling right now, the honest answer is more nuanced though. The hit is real, but it lands differently depending on when you bought, what you own, and what your growth rate assumptions actually are.

This post covers the mechanics of both halves: how the negative gearing quarantine works, how the new CGT regime replaces the 50% discount, which assets and entities are caught and which are not, and what the numbers look like for three different property scenarios.

The one disclosure worth making upfront: this is analysis, not advice. The legislation has not yet passed the Senate, and the ATO implementation rules are still being drafted. Get advice specific to your situation before making any decisions.

What changes 1 July 2027

The date that matters is 1 July 2027, but the mechanics were actually triggered earlier. From 7:30pm AEST on 12 May 2026 (Budget night), the negative gearing restriction attached to any new acquisition of established residential property. That restriction reaches its full operating form on 1 July 2027, when the carry-forward-only treatment applies in full.

The CGT reform runs on the same timeline. From 1 July 2027, the 50% CGT discount that has applied to assets held longer than 12 months is replaced by a two-part mechanism: a CPI-indexed cost base, and a 30% minimum tax floor on real gains. Both changes apply simultaneously from that date.

These are not separate policies that happen to share a start date, they are two halves of the same package. For a negatively geared property bought today, the annual cash flow position changes from 1 July 2027 because losses can no longer offset salary income. The CGT position on sale also changes, but for many holders the indexation math may actually reduce the tax bill relative to the old 50% discount, because inflation is currently eating enough of the nominal gain that the indexed cost base gets close to the sale price. The sting in the tail is the 30% floor, which matters most for high-growth assets at high marginal rates where the investor used to time the disposal into a low-income year.

Together, the two measures are projected to raise $3.6 billion over five years from 2025-26. That revenue estimate reflects Treasury’s view on the scale of the behavioural shift it expects.

The negative gearing quarantining rule

The core mechanic is quarantining, not elimination. Rental losses on established residential property acquired after 7:30pm AEST 12 May 2026 can no longer offset salary, business, or other non-property income. They accumulate as a carried-forward amount and can only be applied against two things: future rental income from residential property, or future capital gains from the disposal of residential property. The carry-forward is indefinite, so the losses do not disappear. They just stop being immediately useful to someone whose financial benefit from negative gearing came from reducing this year’s salary tax.

The grandfathering is the important counterpoint. Any residential investment property owned before 7:30pm AEST 12 May 2026 retains full negative gearing on that asset indefinitely. The rule attaches to the property, not the investor. This is actually broader than what Labor proposed in 2019, which protected sitting investors rather than the individual property. Selling a grandfathered asset to buy a different one resets the clock and you lose the protection.

Which entities are caught, and which are excluded:

• Caught: individuals, partnerships, companies (operating as investors), and trusts.
• Excluded: complying superannuation funds (including SMSFs), widely held trusts, build-to-rent structures, and government housing programs.

Commercial property is unaffected. Shares retain negative gearing as they always have.

The SMSF carve-out has attracted a lot of attention because it looks like a planning opportunity. The practical reality is more constrained. SMSF investors typically do not negative gear because the contribution tax rate inside super is already 15% and the strategic purpose of holding property in an SMSF is usually either passive income or growth realisation, not generating a loss that offsets nothing material. It is worth examining in specific circumstances, but it is not a like-for-like replacement for the personal-name negative gearing most residential investors have been using.

For anyone currently holding a negatively geared established property acquired after Budget night: the position as of 1 July 2027 is that the annual loss you have been offsetting against salary income will carry forward instead. You will continue to accumulate those losses and apply them when you eventually sell or when the property turns cash-flow positive. What changes is the timing of the tax benefit, not its permanent existence.

The new CGT regime

The replacement for the 50% CGT discount is a two-part mechanism that produces a different answer depending on how fast your asset has grown and what your marginal rate is.

Part one is cost-base indexation. For assets held across the commencement date, the cost base for new-regime purposes is the asset’s value at 1 July 2027 (determined by valuation or ATO apportionment formula), indexed by CPI from that date forward. For assets purchased after 1 July 2027, indexation runs from the purchase date. At a 3.5% annual inflation rate (used in the worked examples below), a $750,000 cost base grows to approximately $890,580 over five years. If the asset has only appreciated moderately over that period, that indexed cost base can consume most of the nominal gain, leaving a small real gain for tax purposes.

Part two is the 30% minimum tax floor. Once you have calculated the real gain (sale price minus indexed cost base), you pay tax at the higher of your marginal rate or 30%. For someone on a 32.5% marginal rate, nothing changes from the floor because 32.5% is already above it. For someone earning $200,000 a year at 45%, the floor does not bite on its own because 45% is already higher. What the floor actually eliminates is the strategy of timing a disposal into a low-income year (retiring, taking parental leave, career break) specifically to access a sub-30% effective rate on a large capital gain. That strategy is gone.

The scope expansion is the part that caused surprise when the budget dropped. This is not a residential property measure as the CGT changes apply to all CGT assets held for 12 months or more: shares, crypto, business sales through trusts or individuals, units in unlisted funds. If you hold a large share portfolio personally and were expecting to use the 50% discount on disposal, the new regime applies from 1 July 2027.

The carve-outs are worth naming clearly.

• Owner-occupier main residence exemption is preserved in full.
• Small business CGT concessions are retained.
• The 60% CGT discount for qualifying affordable housing investments is retained (higher than the old general 50% discount).
• Pre-CGT assets (acquired before 20 September 1985): per Treasury, gains accrued before 1 July 2027 will continue to be exempt. Post-2027 treatment falls under the same transitional framework as other CGT assets, with implementation detail still subject to consultation.
• Means-tested income support recipients are exempt from the 30% floor in the year they realise a gain.

For assets already held across the 1 July 2027 commencement date, the gain is split. Gains accrued up to 1 July 2027 are taxed under the old rules (50% discount intact). Gains accrued after that date use the new regime. The ATO will provide an apportionment formula; alternatively, taxpayers can pay for a formal market valuation at the commencement date to establish the split precisely.

The new-builds carve-out

New residential dwellings remain fully eligible for negative gearing under the new regime, indefinitely. The Government framed this as a supply-side incentive, and in structural terms it creates a meaningful bifurcation: investors buying new will retain the tax treatment they have always had, while investors buying established face quarantining.

The definition matters. A new build for these purposes is a dwelling constructed on vacant land, or a redevelopment that increases the number of dwellings on a site. A duplex replacing a house on the same block qualifies. A knock-down rebuild of a single dwelling replacing a single dwelling does not, based on current Treasury guidance (though the legislation has not yet been finalised). The distinction is whether the development adds to the housing supply count.

There is a further restriction as the new-build carve-out applies only to the first purchaser of the dwelling. Once the property is sold second-hand, it becomes established residential property and loses the carve-out. The investor who buys a new apartment from a developer in 2028 retains full negative gearing. The investor who buys that same apartment from the original investor in 2033 does not.

This creates an interesting dynamic for investors considering off-the-plan. The tax advantage is real and durable for the first owner, but it disappears on resale. The exit market for the property in 10 years is therefore constrained to owner-occupiers and investors willing to buy without negative gearing, which means the capital growth assumptions embedded in most off-the-plan feasibilities need revisiting.

The practical observation is that a material share of investor demand is expected to shift toward new builds over the next 12 to 24 months, because that is where the remaining concession lives. Whether the supply pipeline is wide enough to absorb that demand at reasonable margins is a separate question that the budget does not resolve.

Three worked examples

The numbers below are illustrative, not personal advice. Each case uses a 3.5% annual CPI indexation rate, a 5% present-value discount rate, and a five-year hold from today. All three apply carry-forward losses against the new-regime CGT at sale. Under the new rules, accumulated rental losses can offset future residential rental income or future capital gains from residential property, so for an investor who sells at a gain, the carry-forward absorbs part or all of the taxable gain. This structural feature is missing from much of the early commentary on the regime.

These cases simplify by treating the entire five-year hold under the new regime. In reality, properties purchased between 12 May 2026 and 30 June 2027 retain salary offset until 30 June 2027, and gains accrued before 1 July 2027 are taxed under the 50% discount via the transitional split. The simplification slightly overstates the new-regime impact in each case. The “What each case excludes” section after Case C lists other factors held constant for clarity.

What each case excludes

The cases above are illustrative and ignore several factors that would shift the numbers in either direction:

• Stamp duty on purchase: increases cost base (NSW residential investment duty on $750K is approximately $30,000; VIC on $1.2M approximately $66,000; regional varies). Reduces real CGT, more meaningfully under the new regime where the cost base is indexed up from a higher starting point.
• Selling costs: agent commission, conveyancing, marketing (typically 2-3% of sale price). Reduce the real gain.
• Medicare levy: adds 2% to marginal rates for most individuals. Pushes both old-regime and new-regime tax slightly higher than the figures shown.
• Capital works depreciation (Division 43): deductible during ownership at 2.5% of construction cost per year, but reduces cost base at sale, increasing the gain. Effect varies with property age.
• Rent growth and changing interest costs: cases use static annual figures. Rents typically grow 3-4% per year; interest expense changes as principal amortises or as rates move.
• Transitional period for negative gearing: properties purchased between 12 May 2026 and 30 June 2027 still allow salary offset until 30 June 2027. The cases treat all five years as quarantined. In practice the first ~13 months of a today-purchase preserve old treatment, adding approximately $5,000 to $8,000 of additional tax saving in Cases A and B.
• CGT transitional split for assets held across 1 July 2027: gains accrued before 1 July 2027 are taxed under the old 50% discount; gains after are under the new regime using market value at 1 July 2027 (or an ATO apportionment formula) as the cost base. The cases simplify by treating the full hold under the new regime, which slightly overstates the new-regime CGT impact at sale.

What this means for property investors

The clearest pattern across the three examples: the new regime trades annual cash flow benefit for a larger CGT shield at sale. Indexation and carry-forward together absorb most of the nominal gain. The cost is timing rather than total tax.

The structural exposure shifts to two things:

• Timing. The present-value cost of deferring the tax benefit from annual to lump-sum at exit.
• Carry-forward useability. Whether the investor has, or will have, future residential rental income or capital gains against which to apply the accumulated losses.

A handful of practical considerations worth thinking through before 1 July 2027:

• Selling before 1 July 2027 vs holding. Less binary than the headlines suggest. The 50% discount on pre-2027 gains is preserved via the transitional split whether you sell before or after that date. The discount is not “lost” by holding past commencement. What does narrow: (a) timing disposal into a low-income year for a sub-30% effective CGT rate, which the 30% minimum tax floor eliminates from 1 July 2027; (b) for trust-held assets, the ability to stream gains to lower-MTR beneficiaries, which the trust minimum tax limits from 1 July 2028. Just over 13 months to act on either.

• Holding long-term. Carry-forward losses are not lost. They accumulate and offset the eventual CGT event at sale, or they offset rental income from other residential properties. The strategic picture changes with how many properties you hold and your intended hold period.

• New builds. The full negative gearing carve-out is preserved for the first purchaser of a new residential dwelling. CGT treatment for new builds is also unaffected by the quarantine. Trade-off: the carve-out does not transfer to a second purchaser, which constrains the resale market and the capital growth assumptions embedded in off-the-plan feasibilities.

• SMSFs and commercial property are unaffected. Neither is a simple like-for-like switch for personal-name established residential property, but both are worth understanding in the context of portfolio construction decisions.

• One myth worth busting. The negative gearing quarantine does not mean the investment is tax-negative indefinitely. Losses accumulate at zero cost and release against future income in the same category. The real-world question is whether the immediate cash flow cost of losing the annual offset changes the serviceability position for the loan, and whether you can hold through that period. That is a finance and planning question, and the right conversation to be having now rather than in June 2027.

This is not financial advice. If the numbers above intersect with your own position in any meaningful way, get a tax adviser and a finance broker in the same conversation before making decisions.