What the 2026 Federal Budget property tax changes mean for investors and depreciation claims

The announced reforms focus on two key areas:

Under the proposed rules, losses from impacted established residential properties will be quarantined from 1 July 2027.

The changes are expected to apply to established residential properties acquired after 7:30pm AEST on 12 May 2026. Properties owned or contracted before this time are expected to be grandfathered, meaning the current negative gearing rules would continue to apply until the property is sold. This is also expected to apply where a property was owned before the changes as a principal place of residence and later becomes an investment property.

There is also a transition period. Properties acquired after Budget night can still be negatively geared until 30 June 2027. From 1 July 2027, losses from impacted properties may no longer be deductible against other income, such as salary or business income. Instead, those deductions would be carried forward or ‘quarantined’.

What happens to quarantined losses?

Impacted property deductions, including depreciation and other rental property deductions, would be carried forward and used later to offset future residential rental income or residential property capital gains when a property is sold.

For example, if an impacted established property produces a $20,000 rental loss after 1 July 2027, the $20,000 loss would be carried forward. If the property later becomes positively geared and earns $8,000 in net rental income, the investor will be able to use $8,000 of the carried-forward loss to reduce that rental income and therefore tax liabilities to nil, leaving $12,000 carried forward.

If the investor later sells a residential property and makes a $100,000 capital gain, the remaining $12,000 would be used to reduce the gain to $88,000, subject to the final rules.

This makes timely record keeping critical. Investors will need to understand which deductions relate to impacted properties, what has been quarantined, and what may be available to offset future residential property income or gains. Recording depreciation in the relevant income year also gives investors and their accountants clearer records, stronger support for carried-forward deductions, and less risk of missed claims, incomplete information or prior-year amendments.

What about new builds?

New builds are expected to remain eligible for full negative gearing.

However, the definition of a new build is important. To qualify, the property must add to housing supply. For example, a knock-down rebuild that results in the same number of dwellings may not qualify, because it does not add to housing supply.

Meanwhile, a knock-down rebuild that results in additional dwellings, such as replacing one house with a duplex will be eligible to take advantage of negative gearing.

SMSFs and other asset classes

The announced negative gearing changes do not apply to all investors or asset types in the same way. Based on budget notes, SMSFs are expected to be exempt from the negative gearing changes.

Commercial property, shares and other asset classes are also expected to be unaffected by the negative gearing reforms. However, the CGT reforms are broader and are expected to apply to all CGT assets.

From 1 July 2027, the Budget announced the replacement of the 50 per cent Capital Gains Tax (CGT) discount with cost base indexation based on CPI for all CGT assets.

Under the current rules, many individuals and trusts can access a 50 per cent CGT discount when they sell an asset they have held for more than 12 months. The announced new rules replace the discount with indexation, meaning the asset’s cost base will be adjusted for inflation instead.

For example, under the current 50 per cent CGT discount method, if an investor’s property cost base was $600,000 (purchase price + purchasing costs) and sold it for $750,000, the $150,000 capital gain would be reduced by 50 per cent, meaning $75,000 would be taxable at the applicable marginal rate.

Under the indexation method, the investor would instead adjust the asset’s cost base for inflation. Using the same property, if the indexed cost base increased from $600,000 to $650,000, then selling the property for $750,000 would result in a $100,000 capital gain before applying the relevant tax rate.

For properties purchased before 12 May 2026 and sold after 1 July 2027, the gain may need to be split between the period before and after the new rules commence.

For example, using the same property purchased for $600,000, if it was valued at $700,000 on 1 July 2027, the $100,000 gain up to that date would retain existing 50 per cent discount CGT treatment.

If the same property was then sold in 2028 for $750,000, the additional $50,000 gain made after 1 July 2027 would be calculated under the new indexation rules.

This means the investor may still access the 50 per cent CGT discount on the gain made before 1 July 2027, while the gain made after that date would be calculated using cost base indexation.

New build CGT choice

Under the announced rules, investors in new residential properties may be able to choose between the 50 per cent CGT discount or cost base indexation, depending on which produces the better result.

This could make new builds more attractive for some investors, but eligibility will depend on the final legislation and individual circumstances.

Why depreciation records matter

The Budget changes do not remove depreciation deductions. Depreciation remains an important tax deduction for property investors and can help improve after-tax cash flow.

For impacted established properties, depreciation records can help track deductions that are quarantined and carried forward. This matters because those amounts may not provide an immediate tax benefit against other income, but they may still be relevant in a later year when the investor earns residential rental income or sells a residential property at a capital gain.

Depreciation and CGT

Depreciation of plant and equipment and capital works deductions can both affect the CGT outcome when an investment property is sold.

In simple terms, when a property is sold, the capital gain is calculated by comparing the sale price with the property’s cost base. Capital works deductions for the building’s structure, whether claimed or able to be claimed, reduce that cost base over the ownership period.

Eligible plant and equipment assets, such as appliances and carpets, also need to be considered when the property is sold and factored into the tax calculation at sale. These assets are treated separately from the building. If an eligible plant and equipment asset has been fully depreciated, its remaining tax value is nil. If that asset still has value when the property is sold, that value may need to be accounted for separately, such as through a balancing adjustment. This does not reduce the building’s cost base in the same way as capital works, but it can still affect the investor’s overall tax outcome at sale.

CGT event K7 is also relevant for some residential investors. Where depreciation deductions for plant and equipment have been denied, such as for certain second-hand residential assets, the unclaimed decline in value can be recognised as a capital loss when the property is sold or the asset is disposed of. This capital loss can then reduce the investor’s overall capital gain.

This means accurate depreciation records help support the correct CGT outcome by showing:

The 2026–27 Federal Budget announced major changes to how some property investment losses and capital gains are treated.

While the final rules are still subject to legislation, the message for investors is clear: tax outcomes may depend more heavily on property type, purchase timing, ownership structure and the quality of supporting records.

Depreciation remains central to that picture. An ATO-compliant tax depreciation schedule can help investors improve cash flow during ownership, track deductions that may be carried forward, and support accurate CGT calculations when the property is sold.

Having a schedule prepared early helps ensure depreciation amounts are recorded in the right income years, rather than needing to adjust previous years’ records when losses are applied against future income or a capital gain. This gives investors and their accountants clearer records, stronger support for carried-forward deductions, and less risk of missed claims, incomplete information or prior-year amendments.

For more information on how a tax depreciation schedule can help support carried-forward losses and assist with future CGT calculations under the announced changes, contact BMT Tax Depreciation on 1300 728 726 or Request a Quote.