Negative Gearing Changes: What the May 2026 Budget Could Mean for Investors

Ahead of the May 2026 Federal Budget, Treasury has been modelling two significant changes to property investment tax concessions. First, negative gearing would be limited to a maximum of two investment properties per individual taxpayer.

Let's break this down. Currently, there's no limit — investors can negatively gear as many properties as they wish, deducting net rental losses against their salary and other income. Under the proposed change, from a future date (likely 1 July 2027), taxpayers could only claim negative gearing deductions on their first two investment properties. Any additional properties beyond two would need to be self-funding — you could still claim depreciation and expenses, but any net rental loss could only be carried forward against future rental income from that property, not offset against your salary.

Second, the Capital Gains Tax (CGT) discount would be reduced from 50% to 33% for assets held longer than 12 months. Currently, individuals who sell an investment property held for more than a year include only 50% of the capital gain in their taxable income. Under the proposed change, 67% of the capital gain would be taxable (a 33% discount instead of 50%).

Neither change has been legislated or formally announced. They're being modelled by Treasury and may or may not appear in the May Budget.

Treasury modelling reported by multiple outlets suggests the combined reforms would raise approximately $5-7 billion over the forward estimates (4 years) and approximately $30 billion over 10 years. The negative gearing cap is estimated to affect approximately 320,000 taxpayers who currently negatively gear three or more properties.

The CGT discount reduction affects a broader group — approximately 1.2 million taxpayers claim the 50% CGT discount each year, with property assets representing the single largest category. The modelling reportedly shows minimal impact on housing supply because the vast majority of negatively geared investment property purchases are for existing dwellings, not new construction. ABS data confirms that investors account for approximately 35% of all housing finance commitments, but only 7-8% of new dwelling construction is purchased by individual investors claiming negative gearing.

Quick reality check. The remaining investor activity is in the existing housing stock, where it doesn't add to supply. Treasury's position, based on the modelling, is that limiting negative gearing to two properties would redirect some investment demand from existing dwellings into new construction (which would remain uncapped) or into other asset classes like equities and super.

The negative gearing cap at two properties wouldn't affect the vast majority of Australian property investors. ATO tax statistics show that of the approximately 2.2 million taxpayers who own at least one investment property, roughly 71% own only one investment property, 18% own two, and 11% own three or more.

The cap therefore affects only the top 11% of property investors by number of properties owned. However, this cohort tends to be wealthier, higher-income, and more leveraged — they account for a disproportionate share of total negative gearing deductions. The CGT discount change would affect anyone who sells an investment property (or shares, or other CGT assets) held for more than 12 months after the new rules take effect.

This is a much broader impact. Existing property investors who are not planning to sell in the near future are not immediately affected, but the change alters their after-tax return when they eventually do sell. First-time property investors purchasing their first or second investment property would be entirely unaffected by the negative gearing cap.

Owner-occupiers are not affected by either change — negative gearing doesn't apply to your home, and the main residence CGT exemption remains untouched.

Worth knowing: Based on precedent and leaked details, grandfathering provisions are expected to protect existing arrangements. For negative gearing, the most likely approach is that any investment property owned before the announcement date (expected Budget night, May 2026) would continue to be eligible for negative gearing regardless of how many properties you own.

The cap would only apply to properties purchased after the announcement date. This means an investor who currently owns five negatively geared properties would continue to negatively gear all five. But if they sold one and bought a replacement after the cap date, the replacement would be subject to the two-property limit.

For the CGT discount, the expected approach is a start date for the new 33% discount — likely 1 July 2027. Assets purchased before that date would continue to receive the 50% discount when eventually sold. Assets purchased after that date would receive the 33% discount.

This approach mirrors the 1999 introduction of the 50% discount itself, which only applied to assets acquired after 20 September 1999 (assets acquired before that date used the older indexation method). Grandfathering provides certainty for existing investors but means the revenue and housing-supply benefits of the reforms take many years to fully materialise.

Take an investment property purchased for $650,000 (including stamp duty and legals) and sold 8 years later for $950,000, generating a capital gain of $300,000. The investor is on a marginal tax rate of 37% (income between $135,001 and $190,000).

Bottom line? Under the current 50% CGT discount: taxable capital gain = $150,000 (50% of $300,000). Tax payable on the gain = $150,000 x 37% = $55,500. After-tax capital gain = $300,000 - $55,500 = $244,500.

Effective tax rate on the gain = 18.5%. Under the proposed 33% CGT discount: taxable capital gain = $201,000 (67% of $300,000). Tax payable on the gain = $201,000 x 37% = $74,370.

After-tax capital gain = $300,000 - $74,370 = $225,630. Effective tax rate on the gain = 24.8%.

The difference: the investor pays $18,870 more in CGT under the proposed rules — a 34% increase in the tax bill on the sale. For a higher-income investor on the 45% top rate, the difference is even larger: $150,000 x 45% = $67,500 currently versus $201,000 x 45% = $90,450 under the new rules — an additional $22,950. The change doesn't make property investment unprofitable, but it does reduce the after-tax return and makes property less tax-advantaged compared to assets held inside superannuation.

Consider an investor on a $160,000 salary (37% marginal rate) who owns three investment properties, each with a net rental loss (after all expenses including interest, depreciation, and management fees) of $8,000 per year. Under current rules, the total loss of $24,000 is deducted from their taxable income, reducing it from $160,000 to $136,000.

So what does this actually mean? The tax saving is $24,000 x 37% = $8,880 per year. Under the proposed two-property cap (assuming no grandfathering for this example), only two properties' losses ($16,000) can be offset against salary. The third property's $8,000 loss is quarantined — it can only be carried forward and offset against future rental income or capital gain from that specific property.

The tax saving drops to $16,000 x 37% = $5,920 per year. The annual cash-flow impact is $2,960 less in tax savings, meaning the investor needs to find an additional $247 per month to fund the third property's holding costs. For investors with four or five negatively geared properties, the impact compounds — each additional property beyond two requires the investor to absorb the full holding cost without any tax offset against their salary.

This changes the investment equation significantly and may prompt some investors to sell their least-performing properties or shift capital into super or shares. Worth double-checking.

First, don't panic or make hasty decisions. Nothing has been legislated.

Even if announced in the May Budget, the changes are unlikely to take effect before 1 July 2027, and grandfathering provisions will almost certainly protect existing holdings. Second, review your portfolio composition. If you own three or more investment properties and they're all negatively geared, the proposed changes would affect your tax position on the third and subsequent properties (if purchased after the start date).

In plain English: Consider whether your least-performing property should be sold while the current CGT discount still applies. Third, accelerate any planned purchases. If you're planning to buy a second or third investment property, doing so before the Budget announcement (or before the effective date) would likely lock in the current unlimited negative gearing and 50% CGT discount under grandfathering.

Fourth, model the after-tax returns. Use our Negative Gearing Calculator to compare the after-tax cash flow of your investment properties under the current rules versus the proposed rules.

A property that's marginally viable with a $3,000 annual tax benefit from negative gearing may become cash-flow negative without it. Fifth, consider new-build properties. Both major parties have indicated that new construction would remain eligible for full negative gearing to support housing supply — so a new-build investment may be exempt from the cap regardless of how many properties you own.

Sixth, talk to your accountant or financial adviser before the Budget. The two-month window between now and Budget night is the time to make strategic decisions, not after the announcement when the market is reacting.