Negative gearing reform is back on the table. Treasurer Jim Chalmers has confirmed that Treasury is modelling changes to both negative gearing and the capital gains tax discount ahead of the May 2026 federal budget.
Nothing has been legislated yet. But if you own investment property, or you’re planning to buy, you need to understand what’s being proposed and how it could affect your position.
What’s actually being proposed
Two changes are under consideration.
A two-property cap on negative gearing. Treasury is modelling rules that would limit negative gearing deductions to a maximum of two investment properties per person. If you own three or more, the rental losses on your additional properties would be “quarantined,” meaning they could only be offset against future rental income from those properties, not against your salary or wages.
A reduced CGT discount. The government is also looking at cutting the capital gains tax discount from 50% to 33% for assets held longer than 12 months. Right now, if you sell an investment property after 12 months, you only pay tax on half the capital gain. Under the proposed change, you’d pay tax on 67% of the gain.
Both changes are proposals at this stage. The budget is expected in May 2026, and neither has been introduced as legislation.
Who would be affected
The two-property cap is more targeted than most people realise.
ATO data from 2022-23 shows there are 2.26 million individual property investors in Australia. Of those, approximately 214,700 own three or more properties. That’s about 9.5% of all investors.
So the cap wouldn’t touch the vast majority. But for portfolio investors building toward financial independence, it’s a meaningful shift. Around 452,700 investment properties would be exposed under this model, representing the third, fourth, fifth (and beyond) holdings of multi-property investors.
The CGT discount change would affect every investor who sells, regardless of how many properties they own.
How negative gearing works right now
For anyone who needs the refresher: negative gearing means your investment property costs more to hold than it earns in rent. The difference (your net rental loss) can be deducted against your other income, including your salary.
If you earn $120,000 and your rental property runs at a $15,000 annual loss, you’re taxed as though you earned $105,000. At the 37% marginal rate, that’s a $5,550 tax saving. The property still costs you money each year, but less than it would without the deduction.
This isn’t a loophole. It’s how all investment income and losses are treated in the Australian tax system. If your shares run at a loss, you can offset that against other income too. Property just gets more attention because of the dollar amounts involved.
ATO data shows 1.12 million investors recorded a net rental loss in 2022-23, up from 41.9% to 49.4% of all investors. That jump was driven largely by interest rate increases pushing holding costs above rental income.
The grandfathering question
If changes go ahead, it’s highly likely that existing property investments would be grandfathered. That means the new rules would apply to future purchases only, not to properties you already own.
This was the approach Labor took to the 2019 election (limiting negative gearing to new builds, with existing holdings grandfathered), and Treasury modelling for the current proposals operates on the same basis.
For investors who already hold three or more properties, grandfathering would mean your current deductions stay intact. The cap would only bite on new acquisitions going forward.
For investors planning to scale from two to three properties, the timing of your next purchase relative to any announcement becomes significant.
What happened when New Zealand tried this
New Zealand offers the closest real-world comparison. In 2021, the Labour government removed interest deductibility for residential property investors entirely, phased in over several years.
The results were mixed. Investor demand dropped significantly. But rents increased by an estimated 7% to 12% over two years, and the policy did little to improve affordability for first-home buyers. Rising interest rates muddied the picture, making it hard to isolate the policy’s effect from broader market forces.
The policy was reversed in 2024 after the National-led government took power.
It’s worth noting the Australian proposal is far less aggressive than what New Zealand implemented. A two-property cap still preserves negative gearing for most investors. Removing it entirely is a different proposition.
The budget impact
The numbers behind the debate are large.
Parliamentary Budget Office analysis shows negative gearing and the CGT discount combined will cost the federal budget an estimated $181.2 billion in foregone revenue over the decade to 2034-35. That’s the figure driving the political pressure for reform.
On the savings side, the Grattan Institute estimates that reducing the CGT discount from 50% to 33% would save the budget approximately $3.7 billion per year. Changes to negative gearing would raise an additional $1.6 to $2 billion annually.
What it could mean for property prices
Several modelling exercises have looked at this.
The Grattan Institute found that combined negative gearing and CGT changes would reduce property prices by 1 to 2% relative to where they’d otherwise be. Not a crash. A modest cooling effect.
Industry modelling paints a more cautious picture. The Housing Industry Association commissioned research showing that combined reforms could reduce new housing starts by approximately 46,000 dwellings over five years and cost more than 4,300 construction jobs. In a market already struggling to hit the government’s 1.2 million new homes target, that’s a real tension.
The Property Council argues that reducing investor incentives will push some landlords to sell, tightening rental supply in a market where national vacancy rates sit at just 1.1% (SQM Research, early 2026).
Whether you view these projections as alarming or manageable depends on which modelling you trust. The Grattan Institute sees minimal rental impact. The HIA sees material harm to housing supply. Both have legitimate analysis behind their positions.
What investors should actually do right now
Here’s the practical takeaway.
Don’t panic. These are proposals, not legislation. Even if changes are announced in the May budget, implementation would likely be phased, with grandfathering for existing holdings. This isn’t a reason to sell anything.
Understand your exposure. If you own two or fewer investment properties, the negative gearing cap as proposed wouldn’t affect you at all. If you own three or more, run the numbers on what quarantined losses would mean for your annual cash flow.
Model the CGT scenario. If you’re planning to sell in the next few years, the difference between a 50% and 33% CGT discount is real money. On a $200,000 capital gain at the 37% marginal rate, you’d pay $37,000 under current rules versus $49,580 under the proposed discount. That’s $12,580 more in tax.
Talk to your accountant. Tax strategy depends on your individual circumstances. This article gives you the overview, but the specific implications for your portfolio need professional advice.
Keep buying good properties. If the numbers stack up, the property is in a strong location, and your strategy aligns with your financial position, negative gearing changes don’t change the fundamentals of property investment. Growth, yield, and compounding still work. The tax treatment might shift at the margins, but the core wealth-building mechanism remains.
The investors who’ll be best positioned regardless of what happens are the ones who buy based on data, hold for the long term, and don’t over-leverage on the assumption that tax deductions will always look the same.
The policy hasn’t changed yet
As of April 2026, negative gearing and the CGT discount are unchanged. Treasury is modelling reforms. The budget is weeks away. When we know more, we’ll break it down.
In the meantime, focus on what you can control: buying well-researched properties at fair prices in strong locations. That strategy works regardless of what Canberra decides. If you’re buying interstate, the fundamentals of due diligence and location selection matter more than ever.
This is general information only and not financial or tax advice. Tax rules may change. Speak to your accountant or financial adviser about how any proposed changes apply to your specific situation.
If you want to discuss how potential tax changes might affect your investment strategy, book a free discovery call.