Every federal budget cycle, two items reliably appear in the news: negative gearing and the 50% capital gains tax discount. The 2026-27 budget is no different. The political debate is loud, but the actual mechanics underneath it are fairly technical — and most of the key details are already on the public record.
This piece does not argue for or against any change. It explains what the current law says, what Treasury and the Productivity Commission have already published about the possible reform options, and what each option would do to the numbers if you own — or are planning to buy — an investment property.
What the current rules actually say
There is no provision in Australian tax law specifically called "negative gearing." The term describes a situation, not a rule. The actual rule is section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), the general deductions provision. It lets a taxpayer deduct losses they incur while earning income against any other income — including their salary.
When a rental property costs more to run than the rent it brings in, that loss is deductible under s8-1. It reduces your taxable income at your marginal rate. There is no cap on the dollar amount, no limit on how many properties you can hold, and no requirement that the losses only offset property income. This is not a special rule invented for property investors — it is the standard deductions rule applied to rental properties.
The 50% capital gains tax (CGT) discount is a separate and distinct concession. It sits in Division 115 of ITAA 1997. If an individual holds a CGT asset for more than 12 months and then sells it, only 50% of the net capital gain is counted as taxable income. The other 50% is simply excluded. This discount has been in place since 1999, when it replaced an older approach based on indexing costs for inflation.
The combined effect: annual losses during the hold period are deducted at your full marginal tax rate, while the capital gain on sale is taxed at half your marginal rate. That asymmetry is built into the law and has been in place for over 25 years.
What Treasury has on the public record
Each year Treasury publishes the Tax Expenditures and Insights Statement. It estimates how much revenue the Commonwealth foregoes because of tax concessions and structural features that reduce what people pay relative to a standard baseline.
Two line items from the 2025 Statement are directly relevant here. The CGT discount for individuals and trusts is the larger of the two: Treasury estimates it costs approximately $26 billion in foregone revenue annually (Treasury, 2025-26 Tax Expenditures and Insights Statement, treasury.gov.au — exact figure and table reference to be confirmed against the published document). The rental property net loss deduction — the s8-1 offset against non-property income — is estimated separately and runs to several billion dollars annually.
These are government-published figures. They appear in official documents regardless of which party commissioned them.
The reform options that have been publicly modelled
Treasury and the Productivity Commission have analysed or discussed several distinct options. Here are the ones with the most developed public-record analysis:
Option A: Limit negative gearing to new dwellings only. This was the centrepiece of the 2016 federal Labor platform. Under this approach, rental losses on existing (established) properties could only offset future property income and capital gains — not salary or other income. New dwellings (newly constructed properties) would keep full access to the offset against any income. People holding existing investment properties at the time of any change would be grandfathered. Treasury modelled this option in detail during the 2016 campaign.
Option B: Reduce the CGT discount. The 2016 Labor platform also proposed halving the CGT discount from 50% to 25%. This would increase the share of a capital gain counted as taxable income from half to three-quarters. It does not change the annual loss-deduction mechanics at all.
Option C: Cap by number of properties. This option appears in Productivity Commission commentary rather than formal Treasury modelling. It would limit the full loss offset to a small number of investment properties per taxpayer — often discussed as the first one or two. Above that threshold, losses would be quarantined to property income only.
Option D: Income-tested deduction. This would limit the rate at which rental losses can offset income to a fixed lower marginal rate, regardless of what you actually earn. The Productivity Commission has noted this in passing. It would reduce the value of the concession for higher-income taxpayers without eliminating it entirely.
Option E: No change. The current rules remain. This is the legislative baseline and the position that has been maintained through multiple election cycles by both major parties when in government.
What each option does in plain numbers
A worked example makes the differences concrete. Assume an investment property purchased for $900,000 with $700,000 of debt at 6.5% interest. Annual rental income: $36,000. Annual expenses (interest, rates, insurance, maintenance, depreciation): $62,000. Annual pre-tax loss: $26,000. The investor's marginal rate is 39% (income between $135,001 and $190,000 for 2025-26, including the 2% Medicare levy).
Status quo. The $26,000 loss offsets salary at 39%, generating an ATO refund of $10,140. The net annual cash outflow after the refund is $15,860.
Option A (new-dwellings restriction) on an existing property. The $26,000 annual loss can no longer offset salary. It accumulates and can be used against future rental income or capital gains on disposal — but it does not reduce this year's tax bill. The full $26,000 becomes a real annual cash outflow. The loss is not gone permanently; it just does not help with cash flow in the near term. An investor relying on the annual refund to help service the mortgage would have a funding gap until the property earns enough income to absorb it.
Option B (halved CGT discount). This does not change the annual numbers at all. The $15,860 annual cash outflow stays the same. What changes is the tax bill on sale. Suppose the property is sold after 10 years with a net capital gain of $200,000. Under current law, the 50% discount applies: $100,000 is included in taxable income, generating a tax liability of approximately $39,000 at the 39% rate. Under the halved discount, $150,000 is included, generating approximately $58,500. The additional tax on disposal is $19,500 — concentrated entirely at the point of sale.
Both options together (the 2016 Labor package). Annual cash flow changes as under Option A, and the disposal tax increases as under Option B. The after-tax return on the combined strategy drops materially. Treasury and Productivity Commission modelling from 2016 and the 2024 housing inquiry provides quantified estimates, though those depend on assumed capital growth rates and holding periods.
Why this matters even if no reform passes
Even if none of these options ever passes, the policy risk layer is worth understanding if you are buying or holding investment property now.
The annual cash drag on a leveraged property at current interest rates (approximately 6.5% on a standard investment loan) is substantially higher than it was during 2013-2019, when many leveraged residential strategies were built. The negative-gearing offset partially compensates for that drag — which is precisely why it is embedded in the strategy design for most leveraged investors.
If any of the reform options above were legislated, the economics would change for new acquisitions made under the current rules. Grandfathering — if included — would protect existing holdings. It would not protect investments made in the window between a reform announcement and commencement. The exact transition design matters significantly for timing decisions.
In short, a leveraged residential property at current rates and prices carries two layers of risk: a cycle-layer risk (whether prices and rents keep pace with borrowing costs) and a policy-layer risk (whether the rules under which the strategy was structured remain in place). Both are more elevated now than they were through most of the 2010s.
This is a description of current Australian tax law and publicly-recorded reform analysis. It is not personal tax advice. Tax outcomes depend on individual marginal rate, holding structure, prior CGT history, and the specific final form of any reform that passes Parliament. Consult a registered tax agent before acting on any of the above.