The 2026 Budget has created plenty of noise, but it has not changed the core reason people invest in property.
Australia still has a housing shortage. Population growth remains strong. Rental demand is deep. Replacement costs are high. Quality land in good locations is still scarce.
What has changed is the rulebook.
The days of buying any established investment property, negatively gearing it against salary, and relying on time to do the heavy lifting are under pressure. Investors now need to be more selective, more strategic and more conscious of structure.
There are parts of this budget that I think will be challenged, particularly the blanket approach to capital gains across different asset classes. Treating a founder who builds a business from nothing the same way as a passive investor who simply holds an appreciating asset is blunt policy, and I expect the entrepreneurial and small business community to push back hard.
But for property investors, the key point is this: opportunity has not disappeared. It has shifted.
The investors who adapt will still find strong opportunities in this market.
Now let’s break down what changed, what it means, and where we think the best strategies sit from here.
What actually changed
From 1 July 2027, two major changes take effect.
Negative gearing on established residential property will be limited
For established residential property purchased after budget night — 7:30pm on 12 May 2026 — investors will still be able to claim deductions, but rental losses will no longer be able to be offset against salary or wages.
Instead, those losses can only be offset against other residential property income. Any unused losses will carry forward and can be applied against future rental income or capital gains from residential property.
New builds remain exempt, meaning full negative gearing still applies.
But “new build” does not mean what many people assume it means. A knock-down rebuild on a single house block does not qualify if it simply replaces one dwelling with one dwelling. To access the exemption, the investment needs to genuinely add to housing supply.
That could include building two or more dwellings on one site, developing a vacant block, buying into a new townhouse project, or purchasing an apartment in a new development.
The policy is supply-focused. The definition matters.
Capital gains tax has been restructured
The 50% CGT discount will be replaced with cost base indexation.
In simple terms, your purchase price is adjusted for inflation each year, and tax is payable on the gain above that indexed cost base. There is also a minimum 30% tax rate on capital gains.
Investors in new builds can choose between the old 50% discount and the new indexed method, depending on which produces the more favourable result.
Importantly, everything purchased before budget night is grandfathered. The old rules continue to apply in full.
The part most people do not understand
Negative gearing was never free money. It was always a timing benefit.
When you negatively gear a property, you claim deductions during the hold period. Those deductions reduce your cost base. When you eventually sell, you pay capital gains tax on a larger gain because your cost base is lower.
In other words, you give back part of the benefit at the point of sale.
Under the new rules, investors who buy established property after budget night lose the annual cash flow benefit of offsetting rental losses against salary. But those losses still carry forward and can reduce taxable gains when the property is sold.
The net result over a full investment cycle may be no worse — and in some cases may be better — depending on how the asset performs, the investor’s income position, inflation, and the length of the hold.
The small annual cash flow kick is reduced, but the end return can remain strong if the fundamentals are right.
This is the critical point.
The headlines make it sound like the economics of property investment are broken. They are not. The structure has changed. The strategy needs to evolve.
What this means for the market
Borrowing capacity will compress
Banks assess borrowing capacity using a serviceability buffer, generally around 3% above the actual rate.
When negative gearing losses can no longer reduce taxable income in the year they occur, the borrower’s after-tax cash flow position changes. Not dramatically, but enough to matter at the margin.
For investors already borrowing close to their limit, this may reduce purchasing power by 5% to 10%.
That means a buyer who was previously targeting $1.2 million may now find themselves closer to $1.1 million.
The flow-on effect is important. Some investors will be pushed down into lower price brackets, where they will compete more directly with first-home buyers and middle-income households. This may actually increase pressure at the more affordable end of the market.
Middle-income investors will be pushed toward new builds
Higher-income investors will absorb these changes more easily. They have the capacity to carry a property without the annual tax offset, and the indexed cost base may produce a better CGT outcome over time.
Middle-income investors will feel it more directly.
These are the teachers, nurses, police officers, small business owners and PAYG professionals who stretched to buy a well-located established house as their first investment. For them, the annual cash flow hit matters.
The policy clearly nudges this group toward new builds, where full negative gearing still applies.
This is where things become murky.
The new-build sector has always been one of the more dangerous parts of the property market for inexperienced investors. The commissions on new developments are often significant, sometimes $30,000 to $50,000 per sale, and that cost is generally baked into the purchase price rather than clearly disclosed to the buyer.
Investors are often bundled into the same building, buying the same product, at the same time, with the same resale profile.
When it comes time to sell, the question becomes obvious: who is the next buyer?
If the asset only appeals to investors, and the broader investor market has been weakened by tax reform, the exit strategy becomes more fragile.
This is the key question investors need to ask before buying new:
Would an owner-occupier genuinely want this property?
If the answer is no — if it is a cookie-cutter apartment in a tower full of investors, with no scarcity, no land component, limited street appeal and weak emotional demand — then the investor may be buying an asset with a shrinking exit market.
The government’s intention may be to increase housing supply. The unintended consequence may be to funnel less sophisticated investors into products that suit developers and sales groups more than the end buyer.
Investor participation will shift, not disappear
Investors typically represent 20% to 30% of the buyer pool nationally.
That percentage is higher for apartments and lower for houses. It is also lower in premium suburbs where owner-occupiers dominate.
The better the area, the less investors can generally afford to play under the new rules. That creates an interesting dynamic.
There may be less competition from investors in established blue-chip markets, which may benefit owner-occupiers and cashed-up buyers who can move without needing tax concessions to make the numbers work.
But this does not mean investors disappear. It means they move.
They will become more selective. They will focus more heavily on yield, borrowing capacity, rental demand and lower holding costs. That means the more affordable parts of the market may actually become more competitive, not less.
Indexed capital appreciation changes the maths
Under the old 50% CGT discount, investors paid tax on half the nominal gain once the asset had been held for more than 12 months.
Under the new indexed system, the cost base rises with inflation each year, and tax is payable only on the real gain above that indexed amount.
If inflation runs at 2.5% to 3% and a property grows at 6% to 7%, the gap between the indexed cost base and the actual value widens over time.
In the early years, the indexed method may produce a lower taxable gain than the old 50% discount. Over longer holds, particularly where the property performs strongly, more of the gain may become taxable.
The strategic implication is clear.
Hold periods, growth rates and inflation assumptions now matter more than ever.
Strategies that still work
The rules have changed, but smart property strategies have not disappeared. They have shifted.
The next cycle will reward investors who are more deliberate, more selective and more strategic.
1. Dual-income builds
If the tax system now favours new supply, then creating new supply yourself becomes a genuine strategy.
This could mean buying a block with an existing house and adding a second dwelling at the rear. It could mean knocking down and building two townhouses, a duplex, or two freestanding homes on one title.
The key is that the dwelling count increases.
Two income streams from one site, with the new builds qualifying for full negative gearing, can create a powerful combination of cash flow, tax efficiency and long-term land value.
For investors willing to take on more complexity, this is one of the most compelling strategies in the new environment.
2. Rooming houses
For investors comfortable with a more active strategy, rooming houses may become increasingly attractive.
A well-built rooming house on a 650sqm-plus block in the right regional centre or affordable metro corridor can return 8% to 12% gross yield, with five to nine individual tenancies.
That level of income changes the investment equation.
Rather than relying on negative gearing to make the holding position manageable, the property is designed to produce strong positive cash flow from day one.
The rental income is diversified across multiple rooms rather than relying on a single tenant. Vacancy risk is spread. Demand for affordable single-person accommodation is only growing.
This is not a passive strategy. It requires the right location, planning framework, design, compliance, management and tenant profile. But in a market that is about to place a greater premium on cash flow, rooming houses deserve serious consideration.
3. Commercial property investment
Commercial property is likely to become even more relevant.
While the budget has focused heavily on established residential property, we expect negative gearing restrictions will eventually be extended to commercial property as well. It would be unusual for government to leave one investment class open indefinitely once the policy direction has been set.
That said, commercial still has several advantages that remain hard to ignore.
The income profile is generally stronger. Leases are often net, meaning the tenant contributes to outgoings. Lease terms are usually longer. Yields are materially higher than residential property. In markets like Victoria, where land tax and sentiment have pushed some investors out, quality commercial assets are starting to appear at prices and yields we have not seen for several years.
Industrial property is particularly compelling in this environment. Quality industrial assets can still deliver 5% to 6% net yields, while also offering genuine capital growth potential where land is scarce, replacement costs are high and tenant demand remains strong. Unlike many passive residential investments, the return profile is not just reliant on tax treatment. It is underpinned by income, land value, business demand and constrained supply.
The key is asset selection.
Commercial property is not simply “better” because the yield is higher. Investors need to understand tenant quality, lease structure, rent review mechanisms, make-good obligations, building condition, replacement cost and future letting risk.
But for investors with the right capital base, the right advice and a long-term view, commercial property remains one of the most compelling opportunities in the current market.
4. Buying and renovating the family home
This strategy is often overlooked, but it may be the most powerful wealth-building tool available to Australians.
Your principal place of residence remains CGT exempt. Every dollar of capital growth is tax-free.
Buying well, renovating smartly, adding value and repeating the process over time allows households to compound wealth without triggering the same tax friction that now applies to investment property.
As a result, we expect the premium property market to remain well supported. Higher-income households may become even more willing to direct capital into the family home rather than investment property, particularly if the tax environment for investors becomes less attractive.
This could increase demand for quality owner-occupier stock in blue-chip suburbs, especially properties with good land content, renovation upside, period character or long-term scarcity.
In a world where investment property has become more complex, the family home has become even more important.
5. Commercial property for business owners
If you run a business and are paying rent to a landlord, this budget should be a prompt to revisit the numbers.
Buying your own premises through an SMSF or related entity can allow you to build an asset while your business pays market rent.
The rent remains a deductible business expense. The rental income helps service the loan. The property grows in value over time. The structure can be highly effective when executed properly.
This is particularly relevant for medical, allied health, industrial, trade, professional services and specialist businesses with stable premises requirements.
Even if negative gearing restrictions eventually extend to commercial property, this strategy can still make sense because the logic is not built around tax losses. It is built around control, business certainty, asset ownership and converting rent into long-term wealth.
6. SMSF property investment
Self-managed super funds remain highly relevant where appropriate.
SMSFs still offer a 15% tax rate on rental income and a concessional CGT framework that has not been materially altered by this budget.
For investors with sufficient super balances, a long-term horizon and the right advice, SMSF property investment remains one of the most tax-effective ways to hold property.
The key is structure.
Borrowing inside super is more restrictive. Compliance obligations are real. Liquidity matters. But for the right investor, the strategy still stacks up.
7. Lower price point investing
Lower price point investing may become even more competitive.
Yields are generally stronger, debt exposure is lower, and the buyer pool is often supported by first-home buyers, government incentives and rental demand.
There is also a portfolio advantage.
Buying multiple lower-priced properties across different markets can create diversification and give investors the ability to sell down part of a portfolio later without liquidating the whole position.
This matters because more investors are likely to move toward this segment. If borrowing capacity is compressed and holding costs become more important, investors will naturally look for lower debt exposure, stronger yield and more manageable cash flow.
Contrary to what the government may expect, this price bracket could become more competitive, not less.
The bigger picture
Governments change policy. That is what they do.
But the core fundamentals of property investment have not changed.
Population growth, constrained supply, rental demand, land scarcity, replacement cost pressure and the leverage advantage of real assets still matter.
I do expect amendments to the CGT policy, particularly around the blanket treatment of different asset classes. The entrepreneurial and small business community is unlikely to accept these changes quietly.
I also expect the current policy settings to evolve further. Residential property may be the first target, but it is unlikely to be the last. Investors should not build a strategy around the assumption that today’s settings will remain open forever.
That does not mean property investment is broken. It means the lazy version of property investment is under pressure. The investors who thrive in this next cycle will not be the ones who panic. They will be the ones who adapt.
The era of buying any investment property, negatively gearing it against salary and waiting for capital growth to do the heavy lifting is coming to an end.
What replaces it is more intentional, more strategic and, for investors who are willing to think differently, potentially more rewarding.
Julian Muldoon is Director of 1Group Property Advisory, an independent buyer’s advocacy firm operating nationall
Disclaimer: This article provides general commentary only and does not constitute financial or tax advice. Please consult your accountant, financial adviser or tax professional regarding your personal circumstances.
