By Van Anh Le, reviewed by Strafurd York Legal
The 2026 Federal Budget, delivered on 12 May 2026, introduces a number of proposed reforms that will reshape the way residential property investment is treated in Australia.
Although most changes are not expected to commence until 1 July 2027, the policy direction is already clear. The Federal Government is progressively shifting away from long-standing tax concessions associated with residential property investment and discretionary trust structures, while encouraging increased investment into new housing supply and broader tax reform.
For property investors, this Budget is significant not only for what it changes, but for how it may influence decisions being made now, particularly in relation to structuring, timing and acquisition strategy.
1. Proposed Changes to Negative Gearing and Residential Investment Property
One of the most significant proposed reforms is the removal of traditional negative gearing benefits for residential investment properties from 1 July 2027.
Existing investments are expected to be grandfathered. However, the practical impact lies in future acquisitions, where residential investment properties may no longer provide investors with the ability to offset investment losses against personal income in the manner that has historically applied.
This represents a broader policy shift away from supporting leveraged investment in existing housing stock, and toward incentivising new construction.
For many investors, this will require a reassessment of how future purchases are evaluated, not only from a tax perspective, but also in relation to borrowing capacity, cash flow modelling and long-term investment strategy.
Example:
An investor buys a property that earns $35,000 in rent per year, but their total expenses (loan interest, strata, council rates and maintenance) are $50,000 per year.
This means the property makes a $15,000 loss annually.
Under the current rules, the investor may be able to deduct that $15,000 loss against their salary income to reduce their overall tax.
Under the proposed reforms, future investment properties may no longer receive that negative gearing benefit, meaning the investor may need to absorb the full $15,000 loss personally without the same tax relief.
2. Capital Gains Tax Reform and Long-Term Holding Strategies
The Budget also proposes significant reform to the current 50% capital gains tax discount. Under the proposed framework, the existing discount would be removed and replaced with an inflation-indexed approach, together with a proposed minimum 30% tax rate applying to capital gains from 1 July 2027.
This change has direct implications for long-term investment planning.
For many investors, this may materially alter after-tax returns that have historically formed part of long-term property investment strategies.
Where investors have traditionally relied on capital growth and concessional tax treatment upon disposal, the new framework may alter after-tax outcomes over longer holding periods. As a result, decisions regarding acquisition, holding period and eventual disposal may require closer legal and financial alignment from the outset.
For many investors, this is less about immediate impact and more about how investment decisions will be assessed over time.
Example:
An investor buys a property for $800,000 and later sells it for $1.2 million, making a capital gain of $400,000.
Under the current rules, the investor may receive the 50% CGT discount, meaning only $200,000 of the gain is taxed.
Under the proposed reforms, the 50% discount may no longer apply. Instead, the gain may be adjusted based on inflation and then taxed at a minimum 30% rate.
For example, if inflation adjustments reduce the taxable gain from $400,000 to $350,000, the investor may still pay at least $105,000 in tax (30% of $350,000).
3. Increased Scrutiny on Discretionary Trust Structures
The Budget also proposes changes affecting discretionary trusts, including the introduction of a proposed minimum 30% tax rate on distributions made to beneficiaries.
Discretionary trusts have long been used as a common investment and asset-holding structure due to their flexibility in income distribution, asset protection and succession planning.
The proposed changes may reduce some of the flexibility traditionally associated with these structures and may prompt investors and business owners to review whether existing trust arrangements remain appropriate for future acquisitions and investment planning.
For many clients, this is likely to raise broader considerations regarding ownership structuring, intergenerational wealth planning and the long-term management of investment portfolios.
Example:
A family trust earns $120,000 in rental and investment income and distributes $40,000 each to three adult beneficiaries.
Currently, if those beneficiaries are on lower marginal tax rates, the overall family tax payable may be reduced through flexible trust distributions.
Under the proposed reforms, distributions may instead face a minimum 30% tax rate.
This could result in at least $36,000 tax payable on the $120,000 distribution pool, even where some beneficiaries would otherwise have paid tax at lower rates individually.
4. Increased Focus on New Housing and Development Activity
A further theme of the Budget is the continued policy emphasis on increasing housing supply through new residential construction and associated infrastructure investment.
This is expected to support increased activity in off-the-plan developments, townhouse projects, small-scale subdivisions and joint venture arrangements between investors and developers.
While these opportunities may become more attractive under the proposed settings, they also tend to involve greater legal and contractual complexity than standard residential property acquisitions.
In particular, issues such as profit-sharing arrangements, development risk allocation, funding obligations and exit mechanisms require careful consideration at the outset of any arrangement.
What Property Investors Should Be Considering Now
Although the reforms do not take effect until 2027, Budget Night (12 May 2026) already marks a clear policy transition point that is influencing market behaviour.
Investors are increasingly reviewing whether:
- future acquisitions should be brought forward under existing rules;
- established residential property remains suitable for their investment strategy;
- new-build opportunities should form a greater part of their portfolio; and
- current ownership and trust structures remain appropriate for future acquisitions and long-term tax planning.
In many cases, the focus is shifting from individual property selection to broader questions of how investments are structured, financed and documented at the outset.
This is where the legal dimension becomes particularly important. Periods of regulatory change often expose issues that are not immediately visible at the time of acquisition, especially where arrangements between parties are informal or not clearly documented. This may include uncertainty around ownership contributions, informal co-investment arrangements, trust structures that no longer align with intended outcomes, or a lack of clarity around exit and sale mechanisms.
While these issues may not present themselves at the point of purchase, they frequently become significant later, particularly during refinancing, disposal, or where disagreements arise between co-investors. In this context, proper legal structuring at the outset remains one of the most effective ways to manage and mitigate these risks.
How We Assist Property Investors
Our firm advises property investors and high-net-worth clients across all stages of property acquisition and ownership, including:
- residential and investment property conveyancing;
- contract review and due diligence, including off-the-plan purchases;
- trust, company and ownership structuring;
- trust restructuring and asset protection advice;
- co-ownership and investment arrangements;
- joint venture and development transactions;
- financing and security documentation; and
- property-related disputes and enforcement matters.
We also assist clients in reviewing existing investment structures to ensure they remain aligned with current and proposed legal and tax settings.
Looking Ahead
The 2026 Federal Budget represents a clear structural shift in Australia’s residential property investment landscape.
While the full legislative framework will continue to develop, the direction of reform is already influencing how investors approach future acquisitions and long-term strategy.
For many property investors, the key consideration now is not only what to invest in, but how to ensure those investments are properly structured before commitments are made.
If you are considering purchasing an investment property, entering into a joint investment, or reviewing your current portfolio structure, we can assist with tailored legal advice to help protect your position and support your investment decisions moving forward.