Australian Property Tax Concessions

As the 2026 Federal Budget looms, debate has intensified around tax concessions on investment properties. Currently, both negative gearing and a capital gains tax (CGT) discount apply to investment properties under certain conditions, although the federal government is considering removing these concessions, due to them disproportionately benefitting high-income earners and likely contributing to rising housing costs.

Negative gearing is the situation where, across a financial year, the income an asset generates is lower than the cost of owning it, and as a result the owner deducts the resulting loss from their total taxable income. The reason the loss can be subtracted from their income, is because in Australia, income tax is (broadly speaking) paid on personal income minus deductions – and the loss from owning an asset is considered a deduction. Negative gearing effectively softens the loss arising from owning the asset – for every dollar you lose you recuperate a fraction of it, equal to your marginal tax rate. It in principle applies to all asset classes in Australia, although it receives the most attention for investment properties. An investor may wear a loss in a financial year on their property – where the maintenance fees, land tax, mortgage interest, council rates, and property management fees (etc) exceed the rental income – and they can resultantly reduce their tax liability (their total tax paid).

The CGT discount is a rule that says when an eligible asset is sold, a percentage of the capital gains (profit from selling the asset for more than price purchased) realised is exempt from tax. A discount of 50% applies to assets held for longer than 12 months by personal Australian investors, meaning that only half of your capital gains counts towards personal taxable income. This effectively means half of the total capital gain is deducted from personal taxable income. Investment properties are a popular asset class, but certainly not the only one that the CGT discount can be claimed on. If the investor sells multiple eligible assets in the financial year, some of which make capital losses, the discount applies only after calculating the net capital gain, i.e. the net contribution of the assets to the investor’s tax bill. 

There are a few nuances worth observing in negative gearing and the CGT discount. The total post-tax benefit is larger for high-income individuals. This is because deductions from taxable income are applied to the taxpayer’s marginal tax rate (the tax rate applied to their next dollar earned) - which is highest for high-income earners in a progressive tax system. In effect, the reduction in tax (and thus increase in post-tax income), compared to if there had been no deduction, is larger for a high earner than a low earner, given the same asset. As deductions reduce taxable income, they operate in a regressive way in a progressive tax system. Furthermore, as in a progressive system, a decrease to your taxable income decreases your effective tax rate (average tax rate on taxable income), the effective tax you would have paid on the deducted income, had there been no deduction, ends up being less than the total reduction in tax from the deduction. In particular, this means that the CGT discount more than halves the total effective tax paid on capital gains. Finally, it is worth noting that deliberately negatively gearing an asset always incurs a loss compared to positive gearing. When you incur a loss, negative gearing simply recuperates some, but not all, of that loss.

Negative gearing and the CGT discount together provide large incentives to property investors. An investor will often choose to purchase a property they will make losses on, if their increase in post-tax income from capital gains at the end more than offsets their decrease in post-tax income from losses made across the duration of holding the property. Negative gearing reduces the hit taken in post-tax income from ongoing losses associated with the investment property. The CGT discount increases the post-tax income made from the capital gains. As a result, the two tax concessions ensure investment properties generate more post-tax income for the investor than they would otherwise, and more post-tax income for a high-income investor. Demand in the property market expands, particularly among high-income investors, placing upward pressure on property prices. The concessions also push rental prices up, as with higher property prices owners face larger mortgage repayments, and must increase their rents charged to service this debt.

The actual size of the effect on housing and rental prices from negative gearing and the CGT discount is highly debated, although it is generally accepted that the effect has been noticeable: the introduction of the CGT discount in 1999 has been associated with an extended period of strong appreciation in housing prices countrywide. Modelling from The Treasury has also suggested that removing the concessions will have a modest downward effect on both housing and rental prices. The strong appreciation in prices, combined with the fact that housing is an essential good, has led to these concessions for investment properties being heavily investigated.

Outside of investor demand, demand for housing is price-inelastic due to its necessity for human survival. However, association does not imply causation, and there remains significant debate surrounding supply-side factors on property and rental prices, including supply chain vulnerabilities and rising labour costs. On the supply side, it can be argued that negative gearing and the CGT discount have a downward effect on rental prices, as more investment properties lead to more rentals available. 

Australia’s largest bank, CBA, is currently tipping that the federal government will entirely scrap negative gearing for investment properties, as well as remove the CGT discount for all asset classes it currently applies to, in the May 12 Budget. Other financial institutions are less convinced, although there is broad consensus that changes to property tax concessions are imminent. The government has been framing the potential changes around intergenerational equity, ensuring that younger Australians have the opportunity to purchase houses and units, in a market that requires substantial leverage, and favours existing asset holders and high-income investors. Regardless of what happens, the Budget is shaping up to be highly consequential for the future of the Australian housing market, with clear winners and losers.