How tax changes will shift the dial on property investing.
The Great Australian Dream used to be home ownership but for a new generation, that dream has become an investment property.
And who can blame the dreamers, with prices leaping around the country in the past five years, everyone wants in on the action. In Perth, the average price of a home has doubled in the past five years, while in Brisbane it’s up 90 per cent and in Adelaide up 85 per cent, according to PropTrack’s Home Price Index.
But this year’s Federal Budget announced sweeping changes to tax rules around investing in property, which passed the Senate in late June. So, does it still stack up? The short (and annoying) answer: yes and no. But that’s pretty much how the government has planned it.
From next year, tax breaks for property investors—negative gearing and a hefty 50 per cent capital gains tax discount—will only be available to those who invest in new builds. The aim is to redirect investor cash away from existing homes and towards purchases that actually add to Australia’s housing stock.
Along with boosting housing supply, the Government hopes recalibrating incentives will also help ‘level the playing field’ for first home buyers by making existing properties less attractive and attainable for investors.
Negative gearing in a nutshell
But first, what exactly is negative gearing, who uses it and why?
For an investment property to be negatively geared, the cost of operating it (including interest payments on investment loans) must be more than the income it earns from rent. Essentially, it is operating at a loss. Under the old rules, that loss could be claimed as a deduction against the owner’s income (including salary and wages). But under planned changes, from July 1 next year, this tax offset will only be available to those who purchase a new build.
Importantly, negative gearing arrangements for existing properties purchased before changes were announced on Budget night in May, will be ‘grandfathered’ allowing owners to continue to access negative gearing tax breaks until that property is sold.
Who will this impact? Well, according to ATO data, about 230,000 taxpayers buy a negatively geared property each year. Lending data indicates roughly 80 per cent of these would be existing homes rather than new builds. So, that’s about 184,000 existing properties purchased and negatively geared each year that will be impacted by planned changes. The Government hopes much of that demand will shift to new builds, bolstering construction and supply.
But it’s not that simple. Existing homes are often favoured by investors because they rise in value much faster than new builds, with investors banking on these rising valuations over longer terms, rather than rental income, to generate profit when sold (or equity to buy another property). However, that potential profit will be hit hard by an end to the capital gains tax discount on investments on pre-existing properties.
Potential pros and cons
If the numbers don’t stack up, investors may just decide not to invest in real estate at all, leading to a reduction in the number of available rentals, and higher rents. Rents could also rise if investors try to ensure properties are positively geared (that is, that the rent covers operating expenses and loan payments).
For their part, the Federal Government estimates changes will have minimal impacts on rent, equating to around an extra $2/week on median rental costs.
Removing some investor demand from the existing home market will flatten prices but, as with rent, by how much is speculation. The Government estimates changes will shave around 2 per cent off average home price growth over the next two years. Commonwealth Bank modelling estimated a 3 per cent pull back, with prices already softening. (See our Market Shift story in this edition of Haven)
On the flipside, Treasury figures estimate reduced competition from investors will lead to an additional 75,000 owner-occupiers entering the market over the next decade.
Aside from rent and house price impacts, some commentators have suggested the necessary ‘grandfathering’ arrangements around negatively-geared existing properties (purchased before changes were announced) may impact supply as owners may choose to hold these longer to maintain tax advantages.
Also, in a late change to get their Bill through the Senate, the Government agreed to end Limited Recourse Borrowing Arrangements (LRBAs) to buy residential properties through Self-Managed Super Funds (SMSFs), which had become an increasingly popular investment strategy.
There is some concern increased competition from investors could push up prices in the new builds market if the construction industry cannot respond to increased demand.
What is a new build?
What exactly is a ‘new build’? At present, the Government defines it as a residential property which ‘genuinely adds to supply’.
That does not include:
- Knock down rebuilds or substantial renovations;
- Granny flats added to existing properties; and
- Properties that have been occupied for more than 12 months before first sale.
It does include:
- House and land packages on vacant land
- Off the plan apartments and newly-constructed townhouses.
- Duplex developments. For example, if an existing house is demolished and two townhouses are built, these would both qualify as new-builds because they add to the overall housing supply. That means in-fill duplex developments in prime suburbs could become a lot more attractive to developers.
One thing is certain — this is the biggest change to property investingin a generation and while the impact may be felt immediately, the true outcome may not be known for years.
Originally published in Haven Magazine – Spring 2026 Edition, this article has been republished on our website with permission.
