Wondering what the 2026 Federal Budget property tax changes mean for investors and depreciation claims? Industry experts break it down.
While the proposed changes to negative gearing and Capital Gains Tax (CGT) rules are not yet legislated, quantity surveyor firm BMT Tax Depreciation believe they could change how some residential property investors assess future purchases, particularly when comparing established properties with new builds.
For investors, BMT says the key message is simple: tax planning and accurate depreciation records will become even more important.
The announced reforms focus on two key areas:
- Negative gearing for established (second-hand) residential properties;
- Capital Gains Tax treatment for all assets that attract CGT.
Under the proposed rules, losses from impacted established residential properties will be quarantined from 1 July 2027.
The changes are expected to apply to established residential properties acquired after 7:30pm AEST on 12 May 2026. Properties owned or contracted before this time are expected to be ‘grandfathered’, meaning the current negative gearing rules would continue to apply until the property is sold. This is also expected to apply where a property was owned before the changes as a principal place of residence and later becomes an investment property.
There is also a transition period. Properties acquired after Budget night can still be negatively geared until 30 June 2027. From 1 July 2027, losses from impacted properties may no longer be deductible against other income, such as salary or business income. Instead, those deductions would be carried forward or ‘quarantined’.
What happens to quarantined losses?
Impacted property deductions, including depreciation and other rental property deductions, would be carried forward and used later to offset future residential rental income or residential property capital gains when a property is sold.
For example, if an impacted established property produces a $20,000 rental loss after 1 July 2027, the $20,000 loss would be carried forward. If the property later becomes positively geared and earns $8,000 in net rental income, the investor will be able to use $8,000 of the carried-forward loss to reduce that rental income and therefore tax liabilities to nil, leaving $12,000 carried forward.
If the investor later sells a residential property and makes a $100,000 capital gain, the remaining $12,000 would be used to reduce the gain to $88,000, subject to the final rules.
This makes timely record keeping critical. Investors will need to understand which deductions relate to impacted properties, what has been quarantined, and what may be available to offset future residential property income or gains. Recording depreciation in the relevant income year also gives investors and their accountants clearer records, stronger support for carried-forward deductions, and less risk of missed claims, incomplete information or prior-year amendments.
What about new builds?
New builds are expected to remain eligible for full negative gearing. However, the definition of a new build is important. To qualify, the property must add to housing supply. For example, a knock-down rebuild that results in the same number of dwellings may not qualify, because it does not add to housing supply.
Meanwhile, a knock-down rebuild that results in additional dwellings, such as replacing one house with a duplex will be eligible to take advantage of negative gearing.
The announced negative gearing changes do not apply to all investors or asset types in the same way. Based on budget notes, SMSFs are expected to be exempt from the negative gearing changes.
Capital Gains Tax changes
From 1 July 2027, the Budget announced the replacement of the 50 per cent Capital Gains Tax (CGT) discount with cost base indexation based on CPI for all CGT assets.
Under the current rules, many individuals and trusts can access a 50 per cent CGT discount when they sell an asset they have held for more than 12 months. The announced new rules replace the discount with indexation, meaning the asset’s cost base will be adjusted for inflation instead.
For properties purchased before 12 May 2026 and sold after 1 July 2027, the gain may need to be split between the period before and after the new rules commence.
Under the announced rules, investors in new residential properties may be able to choose between the 50 per cent CGT discount or cost base indexation, depending on which produces the better result.
This could make new builds more attractive for some investors, but eligibility will depend on the final legislation and individual circumstances.
The Budget changes do not remove depreciation deductions. Depreciation remains an important tax deduction for property investors and can help improve after-tax cash flow.
Depreciation of plant and equipment and capital works deductions can both affect the CGT outcome when an investment property is sold.
BMTQ concludes that, while the final rules are still subject to legislation, the message for investors is clear: tax outcomes may depend more heavily on property type, purchase timing, ownership structure and the quality of supporting records.
An ATO-compliant tax depreciation schedule can help investors improve cash flow during ownership, track deductions that may be carried forward, and support accurate CGT calculations when the property is sold.
For more information on how a tax depreciation schedule can help support carried-forward losses and assist with future CGT calculations under the announced changes, visit the BMT Tax Depreciation website.