What lies ahead for property investors?

Property investors are facing a whole new world this financial year following the tax reforms announced in the May Federal Budget, the ATO tightening the rules around claiming deductions for holiday homes and the government’s decision to abolish the ability to purchase residential property through self-managed super funds (SMSFs).

While there is no need to panic, the reforms will usher in significant change and require careful thought and detailed modelling of the financial implications for your investment portfolio and cash flow going forward.

New Capital Gains Tax rules

Major reforms to the CGT rules are set to take effect from 1 July 2027. The changes mean property investment assets held for more than 12 months will no longer receive a 50 per cent discount on their capital gain before tax. This will be replaced with cost-based indexation, with gains adjusted for inflation before CGT is applied.ⁱ

A minimum 30 per cent tax rate will also be introduced for net capital gains from 1 July 2027 and will apply to individuals, partnerships and companies. These tax changes will also apply to discretionary trusts from 1 July 2028.

Any capital gains made on an investment property that was held for more than 12 months and sold before 1 July 2027 will be taxed under the existing 50 per cent CGT discount rules. Gains after this date will be taxed using the new minimum 30 per cent rules.

With the window to take advantage of the current 50 per cent discount rule closing on 30 June 2027, property investors contemplating selling a rental property should seek professional advice to understand how these changes could affect their financial position.

Negative gearing changes

One of the most controversial Budget changes is to limit negative gearing for residential property investments to new builds.ⁱⁱ

Properties held prior to Budget night (12 May 2026) are exempt from these changes, but use of negative gearing by taxpayers purchasing established properties will be restricted. For commercial property, the current negative gearing rules continue with no change.

From 1 July 2027, investors who purchase an existing property will only be able to offset their residential investment property losses against other income from residential properties. This includes any capital gains. Excess losses can be carried forward to offset against residential property income in future years. The changes will apply to individuals, partnerships, companies and most trusts, but widely held trusts and super funds (including SMSFs) will be excluded.

New rules for holiday homes

If the Budget proposals aren’t enough to give property investors a headache, the ATO has made it clear its approach to holiday home tax deductions will be tougher.ⁱⁱⁱ
Following the release of a new holiday home tax ruling, owners will now be restricted to minimal private use each year if they wish to retain access to tax deductions.

From 1 July 2026, deductions for ownership costs like mortgage interest, council and water rates, insurance, repairs and maintenance may be denied depending on when and the way a holiday home is used. Advertising and cleaning expenses, booking fees and commissions remain deductible.

Personal use during peak periods is now a signal that a property is primarily a leisure asset rather than an income-producing one. If the property is available for most of the year, but is blocked out during Christmas, Easter, school holidays and local peak periods, it is now likely to be assessed as a property that is not mainly used to generate income.

Time to reassess your property portfolio

Given this strict new interpretation of the deduction rules by the ATO, the Budget tax reforms to CGT, along with the banning of SMSFs from Limited Recourse Borrowing Arrangement (LRBA) for residential properties, property investors are urged to seek professional advice early on and review their property investment strategy in light of the changes.

Transitional rules, valuation approaches and record-keeping requirements will be critical. Investors should ensure documentation is up to date, consider timing of transactions carefully.

If you would like to discuss any of the changes and how they may affect you, please contact our office today.

i Proposed reforms to the CGT rules |Treasury
ii Negative gearing explainer | Treasury
iii Rental property deductions | ATO