Capital Gains Tax on Property: How the 2026 Budget Changes the Rules

For 26 years, Australian investors selling property held longer than 12 months have paid capital gains tax on only half the nominal gain. The 50% CGT discount, introduced in 1999, has been one of the most generous tax provisions in the system. The 2026-27 federal budget has changed it. For residential investment property purchased after 7:30pm AEST on 12 May 2026, the 50% discount is gone, replaced with cost base indexation and a new 30% minimum tax on net capital gains.

This article walks through exactly how the new CGT system works for residential property, who is affected, the worked examples that show what the new tax bill actually looks like, and what investors should do with the information.

How the old 50% CGT discount worked

Under the old rules (and still applying to all property owned on 12 May 2026 and all new builds), capital gains tax on residential investment property worked like this:

1. You sell the property. The capital gain is the sale price minus your cost base (purchase price + costs + improvements)
2. If you held the property longer than 12 months, you reduce the gain by 50%, only half the nominal gain is included in your assessable income
3. The remaining half is taxed at your marginal tax rate, ranging from 0% to 45% (plus Medicare)

For a high-income earner on the 45% marginal rate, a $400,000 gain meant $200,000 included as assessable income and roughly $90,000 of tax, an effective tax rate of 22.5% on the full gain. The 50% discount made long-held property exceptionally tax-efficient.

The new system in three parts

The replacement system has three moving parts:

1. Cost base indexation returns

Before the 1999 reforms, capital gains were calculated on the real (inflation-adjusted) gain. The 2026 budget brings indexation back for residential investment property. Your cost base, purchase price, stamp duty, legal costs, improvements, is indexed to CPI from the date of each cost item. Only the real gain above inflation is taxable.

2. 30% minimum tax on net capital gains

Net capital gains from residential investment property are subject to a minimum 30% tax rate. If your marginal rate is below 30% (someone on a low income or retiree with limited other income), the floor is 30%. If your marginal rate is above 30%, you pay your marginal rate.

3. New builds keep the 50% discount

Properties that were new builds at the time the investor acquired them retain the old 50% CGT discount treatment. This is symmetric with the negative gearing change, investors are being pushed toward funding new supply, with both negative gearing and the full CGT discount remaining available for that segment.

Worked example: long-held established property

Let's compare a hypothetical sale under old vs new rules.

Property: Established 3-bedroom house purchased in 2026 for $700,000 (after budget night, so under new rules). Sold in 2041 for $1,300,000. Holding period 15 years. CPI cumulative over 15 years: assume 45% (3% per year average).

Under old rules (if grandfathered):

• Nominal gain = $600,000
• 50% discount applies: assessable gain = $300,000
• At 45% marginal rate: tax = $135,000
• Effective tax rate on gain: 22.5%

Under new rules:

• Indexed cost base: $700,000 × 1.45 = $1,015,000
• Real (indexed) gain = $1,300,000 − $1,015,000 = $285,000
• At 45% marginal rate: tax = $128,250
• Effective tax rate on real gain: 45%; on nominal gain: 21.4%

For this long-held, moderate-growth property in an inflationary period, the two regimes deliver almost identical outcomes. Indexation does the work that the 50% discount used to do, just via a different mechanism.

Worked example: shorter-held, faster-growth property

Property: Inner-city apartment bought for $800,000 in 2027, sold for $1,200,000 in 2032. Holding 5 years. CPI cumulative over 5 years: assume 14% (2.6% per year).

Under old rules:

• Nominal gain = $400,000
• 50% discount: assessable gain = $200,000
• At 37% marginal rate: tax = $74,000

Under new rules:

• Indexed cost base: $800,000 × 1.14 = $912,000
• Real gain = $1,200,000 − $912,000 = $288,000
• At 37% marginal rate: tax = $106,560

For this shorter-held, faster-growth property, the new system collects roughly 44% more tax than the old. Indexation is less generous than a flat 50% discount when real gains are strong.

Worked example: low-income retiree selling

Property: Investment unit bought for $300,000 in 2027, sold for $500,000 in 2037 by a retiree with $25,000 other taxable income. CPI cumulative over 10 years: assume 28%.

Under old rules:

• Nominal gain = $200,000
• 50% discount: assessable gain = $100,000
• Marginal rate at $125k total income: 30% (mostly 32.5% bracket plus Medicare)
• Tax: roughly $30,000

Under new rules:

• Indexed cost base: $300,000 × 1.28 = $384,000
• Real gain = $500,000 − $384,000 = $116,000
• Marginal rate calculation would suggest mid-20% but the 30% floor applies
• Tax: $34,800

For lower-income investors and retirees, the 30% minimum tax bites where their marginal rate would otherwise have been lower. This is the demographic where the new system is most clearly worse than the old.

Who is grandfathered (the critical detail)

Identical to the negative gearing change, the CGT change uses 12 May 2026 as the cut-off:

• Any residential investment property you owned on 12 May 2026 keeps the 50% CGT discount when you sell, regardless of when that sale occurs
• Properties contracted to be purchased before 7:30pm AEST 12 May 2026 are grandfathered, even if settlement happens later
• Properties contracted after that time are under the new rules
• New builds purchased after the cut-off are exempt from the new rules and keep the 50% discount

What's exempt from the changes

• Main residence: the principal place of residence CGT exemption is untouched. Owner-occupier homes remain CGT-free on sale
• Commercial property: only residential is affected. Commercial, industrial, retail and rural CGT treatment is unchanged
• Pre-CGT assets: anything acquired before 20 September 1985 remains CGT-free
• Shares, managed funds, crypto: these continue under the existing 50% CGT discount system
• Property held in superannuation: SMSF residential property in pension phase continues to be tax-free; accumulation phase rules update separately

What this means for investor strategy

The combined effect of CGT and negative gearing changes is to shift the relative economics of property investment:

• Hold periods matter more. Indexation works better the longer you hold. Short-term flipping is less attractive than it was
• Cashflow matters more than capital growth. Without negative gearing offsets, yield-driven properties have a structural advantage
• New builds dominate the after-tax case for new entries. Both negative gearing and the 50% CGT discount remain in place for new builds
• Spousal and entity structuring becomes more important. Holding property in lower-income hands becomes less effective because the 30% minimum tax sets a floor
• Existing properties become genuinely scarce assets. An older investor portfolio with grandfathered properties has access to tax treatment that new investors can't replicate. This may push up prices for established investor-grade property over time as supply shrinks

Practical next steps

1. Document everything for grandfathered properties. Confirm purchase contract dates, settlement dates, and cost base records are clean for every property owned on 12 May 2026. Talk to your accountant about whether any depreciation schedules need updating
2. Reconsider hold-and-sell timing for grandfathered property. Selling a grandfathered property to buy a replacement under new rules destroys the grandfathered status. The bias toward holding existing properties strengthens
3. Run scenarios on future purchases. Use the new CGT calculation alongside cashflow analysis. The new rules don't kill the case for property investment, they sharpen what works and what doesn't
4. Consider new-build segments seriously. The tax wrapper now favours them materially. House and land in Brisbane and Perth growth corridors, off-the-plan apartments in well-located new developments, and new townhouse stock are the segments that benefit most
5. Use our CGT calculator to model your specific situation under both old and new rules

What about transitional rules?

The legislation as proposed includes a transitional treatment for properties under contract on budget night. If you signed a contract to purchase before 7:30pm 12 May 2026 but had not yet settled, you fall under the old rules. Any modification of the contract after that time may bring the property under the new rules, particularly if the modification changes the purchase price or other material terms. Get legal advice if your situation is borderline.

The new rules apply to sales (CGT events) from 1 July 2026 onward, but only to properties first acquired after the budget-night cut-off. Anyone selling a grandfathered property after 1 July 2026 still uses the old 50% discount.

The bigger picture

The CGT change, on its own, is not as dramatic as the headlines suggest. Cost base indexation roughly approximates a 50% discount over normal Australian inflation cycles for long-held property. The 30% minimum tax mainly affects lower-income investors and retirees. For most middle-and-higher-income investors holding for the long term, the difference is moderate.

The combined impact with the negative gearing change is what shifts the investment landscape. Together, they redirect the next generation of investor capital toward new supply and reward yield-focused, long-hold strategies. Australian property remains a viable, often excellent investment, but the rules of the game have changed. Investors who adapt their approach to the new incentive structure will continue to do well. Those who rely on strategies that worked under the old rules without adjustment will not.

Cover photo: Chris Olszewski, CC BY-SA 4.0, via Wikimedia Commons.