Residential property has long been a popular investment for taxpayers looking to build wealth. However, from 1 July 2027, the rules around negative gearing and capital gains tax (CGT) will change significantly. As such, we explore in this article what investment opportunities may provide access to negative gearing and in some cases, the CGT discount post 1 July 2027.
What is changing?
The first tranche of the Government’s reforms has been enacted. The changes will broadly:
- Limit negative gearing for residential property investments to eligible new residential dwellings from 1 July 2027. Negative gearing will continue to apply to all residential properties purchased, or contracted to be purchased, before 7:30pm AEST on 12 May 2026. Residential properties acquired after that time will cease to be eligible for negative gearing from 1 July 2027.
- Replace the CGT discount with a new indexation regime and a minimum 30% tax rate on capital gains arising from 1 July 2027. Broadly, gains arising before 1 July 2027 will continue to be taxed under the existing CGT rules, including access to the CGT discount where available.
- Allow investors in eligible new residential dwellings to choose between the existing CGT discount available to them under the current rules (for example, 50% discount for eligible individuals) and the new indexation CGT regime.
Existing property owners may already be protected
For many doctors and business owners, the first step is to review their existing portfolio in light of these changes.
Residential investment properties acquired, or contracted to be acquired, before 7:30pm AEST on 12 May 2026 remain grandfathered for negative gearing purposes. Owners can therefore continue to claim rental losses under the existing rules, while investors acquiring established residential properties after that time will be subject to the new restrictions from 1 July 2027.
Existing property owners may also benefit from the CGT transitional rules. Capital gains arising before 1 July 2027 remain subject to the current CGT rules, while the new indexation regime and 30% minimum tax only apply to gains arising from that date.
As a result, residential properties acquired before the commencement of the reforms may offer a more favourable tax outcome than comparable properties acquired post 1 July 2027.
The key concept: “New Residential Dwelling”
The Government’s second tranche of legislation provides the expected definition of a new residential dwelling.
This is important because losses from eligible new residential dwellings are intended to remain deductible against other income and continue to receive more favourable CGT treatment, including ongoing access to existing CGT discount concessions where available to the investor. However, these detailed rules are currently draft legislation and may change before being enacted.
Based on the current draft legislation, a property may qualify as a new residential dwelling where it:
- Is constructed on vacant land
This generally applies where:
- land was acquired without an existing residential dwelling;
- a new dwelling is subsequently constructed or installed; and
- the ownership interest is capable of being separately acquired.
Examples include house and land packages, duplex developments and townhouse developments.
- Adds new dwellings to an existing property
A newly constructed dwelling may qualify where:
- the land already contained at least one dwelling;
- additional dwellings are constructed after acquisition; and
- the number of dwellings on the land increases.
Examples include subdividing land and constructing an additional dwelling or developing additional townhouses on an existing site. Importantly, only the newly constructed residential dwelling or dwellings are eligible.
- Converts commercial property to residential use
A dwelling may qualify where a commercial building is converted into residential accommodation.
Examples include office-to-apartment conversions, warehouse conversions and other commercial-to-residential developments.
- Is purchased shortly after completion
A dwelling may also qualify where it is acquired within 24 months of the issue of the first occupancy certificate. This allows eligible purchasers of recently completed dwellings to continue to be treated as owning a new residential dwelling, even where they were not involved in the original development.
Renovations may not be enough
One of the biggest traps for investors is assuming that a renovated property will automatically qualify as a new residential dwelling. The draft legislation indicates that the concessions are intended to support investments that genuinely add to Australia’s housing supply. As a result, simply renovating, refurbishing or reconfiguring an existing dwelling is not expected to be sufficient to be classified as a new residential dwelling.
Instead, the concessions are generally intended to apply where a development results in the creation of additional housing or the conversion of a non-residential property into residential accommodation. Investors undertaking renovation or redevelopment projects should therefore carefully consider whether the project will meet the definition of a new residential dwelling under the final legislation if they are looking to benefit from negative gearing or have options available for capital gains tax purposes.
What about commercial property?
Commercial property remains an attractive alternative for many medical professionals and business owners. The negative gearing restrictions are aimed at residential property investments. Accordingly, commercial property losses should generally continue to be deductible under the existing rules, subject to the ordinary tax provisions.
This means investments such as:
- Medical suites;
- Offices;
- Retail premises; and
- Warehouses,
may continue to offer negative gearing benefits.
The capital gains tax implications of a commercial property will remain broadly the same as an existing residential property. Where an investor is currently entitled to a CGT discount, that discount will generally be replaced by the new indexation regime and 30% minimum tax for gains arising from 1 July 2027. By contrast, eligible new residential dwellings will retain access to the existing CGT discount concessions available to the investor.
Investments likely to maximise both negative gearing and CGT outcomes after 1 July 2027
For investors seeking to preserve negative gearing and more favourable CGT outcomes after 1 July 2027, the most attractive opportunities are expected to involve:
- New residential developments;
- Housing projects that add new residential dwellings;
- Commercial-to-residential conversion projects; and
- Newly completed dwellings that satisfy the final legislative requirements.
The potential CGT benefits available for these investments will depend on the structure used to hold the asset. For example, eligible individuals and trusts may currently access a 50% CGT discount, complying superannuation funds generally receive a one-third discount, and companies are not entitled to a CGT discount.
By contrast, investors considering established residential property may need to place greater emphasis on rental yield, cash flow and long-term capital growth. Whie these investments may still be attractive from a commercial perspective, they are less likely to benefit from negative gearing and CGT concessions expected to apply to eligible new residential dwellings after 1 July 2027.
Key takeaways
The property investment landscape is changing, but negative gearing is not disappearing completely.
From a tax perspective, a key issue will be whether an investment qualifies as a new residential dwelling under the final legislation. For many medical professionals and owner-managed business owners, this may shift attention away from established residential property and towards developments that genuinely add to housing supply.
However, tax outcomes are only one factor to consider. An investment that delivers a favourable tax result may not necessarily align with an investor’s personal circumstances, cash flow requirements, investment strategy or long-term financial goals. As a result, investors should evaluate potential opportunities from both a commercial and tax perspective before entering into a contract.
Contact Pilot
If you have questions regarding the tax implications of your property investments, contact Angela Stavropoulos or Kristy Baxter at taxmed@pilotpartners.com.au or (07) 3023 1300.