Budget tax changes won’t end property investing – but they will change the game

Some commentators are calling it a blow to investors. Others are suggesting it will dramatically improve housing affordability for first home buyers.

As usual, the reality is more nuanced.

The budget changes will not remove the fundamentals that drive property markets: population growth, household formation, income, borrowing capacity, rental demand, supply constraints, and confidence.

But they will change the after-tax maths for investors.

And when the maths changes, behaviour changes.

The biggest change is not just tax – it is borrowing capacity

From 1 July 2027, negative gearing for residential property is proposed to be limited to eligible new builds. Existing arrangements will remain unchanged for properties held before budget night, while investors who buy eligible new builds will still be able to deduct losses from other income.

That distinction matters.

Many investors are focusing on the future tax bill. But the more immediate issue may be borrowing capacity.

When a bank assesses an investor’s ability to service debt, negative gearing has historically been relevant because some lenders allow the expected tax benefit to be added back into the servicing calculation.

Remove that add-back for established residential property, and some investors will simply be able to borrow less.

We recently modelled a scenario where an investor earning $160,000 per annum, with no dependants and no other debt, was buying an established property renting for around $615 per week. On those assumptions, borrowing capacity dropped from approximately $640,000 to $583,000 – a reduction of about 9 per cent.

In practical terms, that can feel like the equivalent of a sudden 1 per cent interest rate increase for that buyer.

That does not mean investors disappear.

It means their buying power changes.

And if their buying power changes, the parts of the market they can compete in may also change.

Established property will not be treated the same way

The budget papers make an important distinction between established residential properties and eligible new builds.

For established residential properties acquired after 12 May 2026, rental losses incurred from 1 July 2027 will no longer be deductible against salary or other personal income. Instead, those losses will only be deductible against residential property income, including rent and capital gains, with excess losses carried forward into future years.

That means the losses are not necessarily lost.

But they are less useful.

For many investors, the value of negative gearing has been the ability to reduce taxable income each year while holding an asset expected to grow over time. Under the proposed rules, that benefit becomes much more limited for established residential property purchased after budget night.

This is likely to change the way investors assess cash flow.

A property that looked acceptable under the old rules may no longer stack up under the new rules, particularly if it is heavily negatively geared, has a low yield, or requires a large amount of debt.

That does not automatically make established property unattractive.

But it does mean investors will need to be far more disciplined about the numbers.

Not all ‘new’ property will qualify

One of the most important details is the definition of a new build.

The intent of the policy is not simply to reward anything that looks new or recently renovated. The stated objective is to support investment that increases housing stock.

That is a critical distinction.

An eligible new dwelling may include a property constructed on previously vacant land, a newly constructed townhouse, an off-the-plan apartment, or a project where one dwelling is demolished and replaced with a greater number of dwellings.

But investors need to be careful.

A substantial renovation is not the same thing as adding new housing supply. A knockdown rebuild that simply replaces one freestanding house with another may also fail to achieve the policy objective. The detail matters.

This is where investors can get caught.

The tax tail may start wagging the investment dog.

Some investors will be tempted to buy “new” purely for tax reasons, without properly assessing location, demand, supply pipeline, design, scarcity or resale appeal.

That would be a mistake.

A poor-quality new property in an oversupplied location does not become a good investment simply because it has better tax treatment.

The CGT change is more complicated than many realise

The second major reform is the proposed replacement of the 50 per cent capital gains tax discount with an inflation-indexed model and a minimum 30 per cent tax on realised gains from 1 July 2027. The reforms are intended to apply only to gains arising after 1 July 2027, with investors in new builds able to choose between the existing 50 per cent CGT discount and the new arrangements.

This does not automatically mean every investor pays more capital gains tax.

If an asset only modestly outperforms inflation, indexation may be no worse – and in some scenarios could be better – than the current 50 per cent discount.

But if a property delivers strong growth well above inflation, the new regime is likely to reduce the after-tax reward.

That is a major strategic shift.

Investors can no longer assume the same simple tax outcome at exit. They will need to model the likely after-tax result more carefully, particularly when comparing established property, new builds, shares, commercial property or development strategies.

The change also introduces complexity.

For assets held before 1 July 2027 and sold after that date, investors may need to separate the gain accrued before the change from the gain accrued after it. In practice, that could require valuations, apportionment calculations and much more careful record keeping.

For many investors, this is not just a tax change.

It is an administration change.

Trust structures need review, not panic

The proposed 30 per cent minimum tax on discretionary trust income from 1 July 2028 is another significant change. The government has also announced rollover relief for three years from 1 July 2027 to assist those who may wish to restructure.

For investors who use family trusts, this is not something to ignore.

But it is also not something to rush into restructuring before the final legislation and professional advice are available.

Trusts are used for reasons beyond tax, including asset protection, succession planning and control. The right response will depend on the investor’s personal circumstances, asset mix, income, family situation, and long-term strategy.

The practical takeaway is simple: investors using trusts should speak with their accountant and adviser well before the start dates, but they should avoid knee-jerk decisions based on incomplete details.

The impact will be concentrated – not uniform

The mistake investors often make is thinking about “the property market” as one market.

It isn’t.

Australia has thousands of individual suburb-level house and unit markets, and the budget changes are unlikely to affect all of them in the same way. In our own market modelling, the likely impact is less about a broad national fall in property values and more about a shift in where investor demand flows next.

The most direct pressure is likely to be felt in established residential investment properties bought by individuals in their own names, particularly in lower-yielding areas where the loss of negative gearing benefits makes the cash flow harder to justify.

That does not necessarily mean a wave of forced selling. In fact, our view is that many existing investors are more likely to sit tight, especially where their properties are grandfathered under the old negative gearing rules. The bigger change is likely to come from what new investors choose not to buy.

If fewer investors are prepared to buy established dwellings, vendors in some markets may find it harder to sell quickly or command premium prices. That could create better buying conditions for strategic investors who understand the numbers and are prepared to negotiate.

But demand does not disappear – it moves.

Our analysis suggests investor interest is likely to be redirected into several areas:

• Eligible new dwellings, where borrowing capacity and negative gearing treatment are more favourable.
• Infill development stock, where new supply can be created in established locations.
• Higher-yielding properties, including some regional markets and specialist accommodation models.
• Commercial property, where negative gearing remains available if held in personal names.
• Lower-priced established property, where investors with reduced borrowing capacity may still be able to compete.

That last point is important. While the reforms are intended to help first home buyers, there is a real possibility they will increase investor competition in some lower-price brackets. Investors who can no longer borrow as much for established property may simply adjust their search criteria and chase more affordable assets. In some locations, that could put them directly back into competition with first home buyers.

The rental impact is also likely to be uneven.

If investors are discouraged from buying established dwellings in inner and middle-ring suburbs, the pool of rental properties in those high-demand locations may gradually tighten. That could place upward pressure on rents in established suburbs where tenants want to live the most, even if national rental averages show a more modest impact.

By contrast, areas with a surge of investor demand for new stock, such as greenfield estates or large new dwelling corridors, could see more rental supply created over time, potentially limiting rental growth in those pockets.

So the budget may produce a split market:

Established investor stock in some areas may soften, while new dwellings, development sites, higher-yielding assets, and tightly held owner-occupier suburbs may attract stronger interest.

That is why suburb selection becomes even more important.

In the next phase of the market, growth is likely to be determined less by generic national headlines and more by the balance of local supply and demand. Suburbs with excessive investor ownership, weak tenant demand or a large pipeline of competing stock may carry more risk. Scarce, owner-occupier-driven locations with limited supply are likely to be better placed, particularly if interest rates start to ease in 2027.

The budget has not created a simple “good” or “bad” market for investors. It has created a more fragmented one.

And in a fragmented market, better information becomes a significant advantage.

There may be opportunities for active investors

For developers, renovators, and active investors, the changes may create opportunities.

If more investors want new dwellings, someone has to create them.

That could increase demand for well-located infill projects, particularly where new supply can be delivered into established suburbs rather than distant greenfield locations.

However, that opportunity comes with risk.

Construction costs remain under pressure. Finance remains more difficult than it was several years ago. Feasibilities need to be stress-tested, not just prepared. Builders need to be checked carefully. Contracts need to be understood.

The budget may increase demand for new housing, but it does not magically make every project viable.

Active investors still need to buy well, manage costs, understand local demand and ensure the finished product suits the buyer or tenant market.

There is also a potential opportunity in commercial property.

Because the proposed negative gearing changes are targeted at residential property, commercial property may become more attractive to some investors seeking yield, cash flow and tax deductibility. But commercial property carries its own risks, including vacancy periods, tenant quality, lease terms, incentives, maintenance obligations and sensitivity to business conditions.

Again, strategy matters.

First home buyers may not get a clean win

A key objective of the reforms is to help “level the playing field” for first home buyers and support more home ownership.

But the effect may vary sharply by market segment.

If investors pull back from established, low-yielding housing, some first home buyers may face less competition.

However, if investors instead move into lower-priced areas, new estates or higher-yielding stock, they may still be competing with first home buyers – just in different locations.

That is the danger of assuming policy changes play out evenly.

They rarely do.

In one suburb, the change may reduce investor demand.

In another, it may increase it.

In one market, rents may rise because established rental stock becomes tighter.

In another, rents may soften because a large amount of new investor-owned stock enters the rental pool.

This is why national averages can be misleading.

Property investors need to understand the specific market they are buying into, not just the headline policy setting.

Strategy matters more now

The core message for investors is not “stop investing”.

It is: stop relying on tax concessions to make a marginal deal look acceptable.

The next phase of the market will reward investors who understand their numbers before they buy.

That means stress-testing borrowing capacity, cash flow, tax outcomes, rental demand, vacancy risk, construction costs, and exit scenarios.

For existing investors, the priority is to understand what is grandfathered, what is not, and how future decisions may affect the portfolio.

For new investors, the priority is to compare opportunities on their underlying merits, not just their tax treatment.

For developers and active investors, there may be a genuine opportunity. If more buy-and-hold investors are pushed toward new supply, well-located infill projects may benefit.

But rising construction costs, funding pressure, and feasibility risk still need to be managed carefully.

The budget has changed the rules of engagement.

It has not changed the need for discipline.

Property investing was never meant to be about chasing tax deductions. The strongest investors will now be the ones who can adapt, think strategically and buy assets that still make sense when the tax assumptions are stripped back.

In other words, the game has not ended.

But investors who keep playing by the old rules may find the market has moved on without them.

Simon Buckingham is a co-founder and director of Results Mentoring.

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