What Has Changed?

Two significant developments have recently occurred that fundamentally alter the economics of property investment in Australia. The first and most obvious are the recent Federal Budget changes.

From 13 May 2026, losses on established investment properties can no longer be offset against wage or salary income. Losses may only be offset against other property income.

From 1 July 2027, the existing 50% CGT discount for properties held for more than 12 months is replaced by a 30% minimum tax floor (with cost-base indexation). This will be applied pro rata, meaning that if the property has been owned for 10 years of which 1 year was under the new scheme, the previous 9 years will be accounted for under the old CGT discount system. It goes without saying that the longer you hold the property, the greater the portion that will fall under the new system’s calculation method.

While these Budget changes are profound, one recent ruling has flown under the radar. The Tax Office has finalised ATO Ruling TR 2026/1.

This ruling effectively blocks the use of investment properties from personal usage by owners. Holiday homes that are primarily used for personal leisure or where usage occurs in peak periods (e.g. Christmas or school holidays) are now blocked for private use. Owners who do this face the prospect of having their properties reclassified as “leisure facilities.” Once reclassified, all deductions are denied in full (interest, land tax, rates, depreciation).

The burden of proof then falls on the owner to prove otherwise.

Who Are Most Affected By These Changes?

• PAYG “Mum and Dad” investors – Holding costs on leveraged established properties become cash-flow prohibitive without wage-offsetting
• Young investors / Rentvestors – Borrowing capacity is reduced; refund-based cash-flow buffer is removed; rent vesting strategy is effectively eliminated
• Property flippers – Hit three ways: holding costs, higher CGT on exit, and a shrinking pool of future buyers
• Property speculator – Risk-reward ratio deteriorates significantly; 30% minimum tax floor reduces net returns on exit
• Holiday homeowner – True holding costs effectively double overnight and the hybrid lifestyle investment model is no longer viable
• Discretionary trusts – Primary structural tax advantage on disposal is now stripped from July 2027

The Broader Market Impact

Together, these changes collectively shift the demand curve to the left, which means there should be less demand at every price point. For established residential and holiday homes, we could see downward price pressure.

The Government suggests the new build carve-out for negative gearing will be an offset solution and allow investors and younger people to access new build properties. The issue with this is that once sold, this property ceases to become an investment property for future buyers and may trap the original investor into what could quickly become an illiquid market. This becomes especially relevant when there are new builds going up around them.

For younger property investors, they also face tougher lending rules and recently rising interest rates. Each rise in interest rates reduces the borrowing capacity that banks will provide. Banks add a 3% serviceability buffer in addition to the current interest rate. Hence, rising interest rates and falling house prices are a combination that don’t exactly work for younger lenders, especially when their borrowing capacity takes a 10% hit.

My other concern is that the pool of available investment properties will tighten. Existing property investors are strongly incentivised to hold onto their existing investment properties given the “grandfathered” tax characteristics of these properties. Older, more central apartments and units will probably remain tightly held, keeping market turnover low. With a pool of available investment properties tightening, this should push up weekly rents. For the young investor trying to save for a deposit, this will eat into their savings.

In conclusion, I have reservations that younger people are the winners of these changes. We shall see in the next 18 months.