Federal Budget 2026-27: What the Two-Property Negative Gearing Cap Would Actually Cost You

This article is general information only and does not constitute financial or tax advice. Consult a qualified tax professional for advice specific to your situation.

Three weeks out from the 2026-27 federal budget, the property tax conversation has shifted from "might something happen?" to "what, exactly, and by when?"

Treasurer Jim Chalmers delivers the budget at 7:30pm on Tuesday 12 May 2026. Treasury is actively modelling a two-property cap on negative gearing and a reduction in the CGT discount from 50% to 33% on residential investment property. The Labor government holds a 94-seat majority in the House of Representatives, so nothing crossbench-dependent is holding changes back. Backbench MPs are publicly lobbying the Treasurer to act. Industry bodies are lobbying hard in the other direction.

This post is not an attempt to predict the budget. Nobody outside Treasury knows what will actually land. What it does do is work through the specific numbers, so if the two-property cap does get announced on 12 May, you can do your own math on what it costs you.

For background on how negative gearing currently works and a general history of reform proposals, see our negative gearing changes 2026 post. This piece is more narrowly focused on the specific mechanics and cash flow impact of the cap proposal.

What Treasury Is Actually Modelling

Three pieces of policy are being developed in parallel, and they interact in ways that matter for the end cost.

The Two-Property Cap

Under the cap as modelled, you can only claim negative gearing losses against salary or wage income on your first two investment properties. Losses from property three onwards would be quarantined against other rental income, not deductible against your pay. If you have three properties running losses of $10,000 each, the first two losses offset your salary as they do today. The third $10,000 is held as a paper balance you can use later against future rental profit or against gains at sale.

The Parliamentary Budget Office has costed a stricter version of this idea, limiting the benefit to a single property, and estimated the package at $5.8 billion in savings over the forward estimates to 2025-26. The two-property version modelled at the Treasurer's request is a softer variant of that concept.

ATO data indicates there are around 2.26 million Australians with investment property, and approximately 640,000 of them own two or more. The two-property cap is designed to catch the tail of portfolio holders without directly changing the tax position of the typical one or two property landlord.

The CGT Discount Reduction

The second piece is a reduction of the CGT discount from the current 50% to 33% on residential investment property held more than 12 months. Shares and other assets would reportedly retain the 50% discount. The Parliamentary Budget Office estimates the CGT discount currently costs the federal budget around $247 billion in forgone revenue over the decade, which is why it is a Budget savings target in almost every think-tank reform package.

Grant Thornton Australia's 9 April 2026 client alert on the proposed changes notes the range of options under discussion, from a 30% discount to a full return to the Keating-era cost base indexation method used between 1985 and 1999. Their advice is clear on one point: "Any future changes may include grandfathering or transitional rules, but historically this cannot be assumed."

A Minimum Investment Tax

A third piece showing up in the commentary is a 27.5% minimum tax rate on non-labour income, including family trust distributions. This one is less directly a property policy than a broader structural reform, but it would matter for landlords who hold property through a family trust.

Who Is Saying What, Three Weeks Out

This is a budget where the lobbying is unusually open.

On the reform side, Labor MP Rob Mitchell told media on 15 April that he supports restricting negative gearing to newly built properties while grandfathering existing landlords. His direct quote: "I'd certainly support changes to capital gains tax and I would support changes to negative gearing." A poll of 4,000 Australians found two-thirds of respondents back CGT and negative gearing changes. Independent senator David Pocock backs reform with grandfathering. Greens senator Nick McKim wants reform without grandfathering.

On the industry side, the Urban Development Institute of Australia's 2 April submission warns that raising taxes on housing "reduces supply and undermines the viability of new residential projects." UDIA president Oscar Stanley points out that private investors deliver over 53,000 rental properties a year, which is more than the five-year target of the $10 billion Housing Australia Future Fund. The Housing Industry Association, Master Builders, Property Council and REIA commissioned modelling from Qaive and Tulipwood Economics finding that "reducing access to either will only result in a reduction in new housing supply." The HIA modelling estimates that restricting negative gearing to new construction with grandfathering would reduce GDP by $1.6 billion and dwelling starts by 22,750 over five years.

On the investor side, the Money.com.au survey covered by Elite Agent found 61% of investors would pull back or sell if both changes land. Forty-five per cent of South Australian investors, 42% of Queensland investors, and 38% of NSW investors said they would reconsider holdings if the CGT discount drops.

Read all that back and what you have is a government with the numbers to legislate, a backbench that wants it to, and a coalition of industry groups lobbying hard against. The wider public is closer to the MPs than the industry groups in recent polling.

The Grandfathering Question

This is the single most important structural question for anyone currently holding property.

Under Labor's 2019 proposal, negative gearing would have been restricted to new construction only, with existing properties grandfathered under the current rules until sold. That is the template most commentators and MPs are pointing to when they talk about grandfathering in 2026.

There are two reasons not to treat it as certain. First, grandfathering creates what economists call a "lock-in" effect, where investors hold properties longer than they otherwise would to preserve the favourable tax treatment. Several inquiry submissions have argued against grandfathering on exactly those grounds. Second, the Greens have publicly opposed grandfathering, and while Labor does not need the Greens in the lower house, it still negotiates with them on legislation in the Senate.

The middle-probability outcome based on current commentary is grandfathering on purchase date, meaning properties contracted before budget night retain current rules, anything after does not. A harder-line outcome is grandfathering on announcement but transitioning to new rules after a set period such as five or ten years. The hardest line, favoured by the Greens, is no grandfathering at all.

For planning purposes, do not assume grandfathering is locked in until the budget papers confirm it.

The Cash Flow Math on a Typical Negatively Geared Investor

Let us put numbers on what the cap scenario actually costs. Consider a landlord with three investment properties, all modestly negatively geared. The third property is a $700,000 apartment in Brisbane earning $30,000 in rent and running $42,000 in deductible costs, for a $12,000 paper loss.

Today's Position

Under current rules, the $12,000 loss reduces the landlord's taxable salary income. At a 37% marginal rate, that saves $4,440 in tax. The real cash cost of holding the property is $12,000 in cash outflow minus the $4,440 tax saving, giving a net after-tax cost of $7,560 a year.

Under the Two-Property Cap With Grandfathering

If the property was acquired before the budget start date, nothing changes. The loss keeps offsetting salary. This is why the policy is often described as "back-book safe." Most existing investors, including most three-plus property holders, keep their current tax position on properties already held.

Under the Two-Property Cap Without Grandfathering, or on New Acquisitions

The $12,000 loss on property three is now quarantined. It cannot be deducted against salary. The tax benefit of $4,440 disappears. The real cash cost of holding the property rises from $7,560 to the full $12,000 a year. That is an increase of $4,440 per year per marginally geared property beyond the cap.

If the landlord holds five properties each running a $12,000 loss, and grandfathering applies on the first two but not the third, fourth and fifth, the lost salary offset is $13,320 a year. That does not disappear forever. It accumulates as a carry-forward loss that becomes useful against future rental profit or against capital gains at sale. But it is no longer immediately usable cash flow.

Under the CGT Discount Cut From 50% to 33%

Consider the same Brisbane property bought for $700,000 and sold ten years later for $1,050,000. The nominal gain is $350,000.

Under today's 50% discount, half the gain ($175,000) is added to taxable income. At a 37% marginal rate, that is $64,750 in CGT.

Under a 33% discount, two-thirds of the gain ($233,450) is taxable. At the same marginal rate, that is $86,376 in CGT. The after-tax sale proceeds shrink by $21,626 from the same gross sale price.

These two pieces interact. A landlord forced to realise a gain because their quarantined losses are finally usable against that gain is, in effect, facing a higher marginal effective tax rate on property investment than they did before either change.

Calculate Your Own Numbers

Negative gearing math is sensitive to your marginal rate, loan balance, rent and deductible costs. Run your own numbers on each property you hold.

If you want to see the CGT discount impact on a sale specifically, use the capital gains tax calculator to model both the 50% and 33% scenarios on the same property. For the broader cash flow picture without the tax offset, the cash flow calculator shows what each property actually costs to hold on a before-tax basis.

Practical Moves Worth Considering in the Next Three Weeks

Most of what we have seen from investor-facing commentary in the last fortnight is calls to act fast. Sell before the budget. Restructure before the budget. Lock in gains at the 50% discount. Most of that advice is bad.

Three weeks is not long enough to make a sound property decision. Transaction costs on a sale run to 5 to 7% of the sale price once agents, conveyancing and marketing are included. CGT crystallises on the sale, often in the same financial year as your normal income. And any decision you make before 12 May is made under uncertainty about whether changes even land, and whether grandfathering applies if they do.

What does make sense to do in the next three weeks falls into five categories.

Know Your Current Position, Property by Property

Work out the exact net position on each property: rental income, every deductible expense, loan interest, depreciation and the cash versus tax position. If you cannot answer the question "what does property three cost me after tax?" within five minutes, you are not in a position to make good decisions about it under any reform scenario.

Maximise Depreciation Claims Before Year End

Depreciation is the most commonly missed deduction category for self-managing landlords. It is unlikely to be touched by any budget reform. If you do not have a current quantity surveyor's schedule, getting one before 30 June pulls the full year of deductions into your 2025-26 return. Use the depreciation calculator to estimate what you could be claiming before you commission a formal schedule.

Model Your Portfolio Without the Tax Benefit

Run the numbers on each property as if the loss offset did not exist. If a property is only viable because of the salary deduction, you now know which property is most exposed under any quarantining rule. That does not mean sell it this week. It means know which one is the pressure point so you can respond cleanly after the budget.

Track Every Dollar of Capital Expenditure Properly

Under a quarantining scenario, losses that cannot be used against salary are carried forward. Those carry-forward losses only have value if every deductible expense is substantiated. The EOFY landlord checklist covers what proper records look like. Our rental property tax deductions guide walks through every deductible category at the line-item level.

Talk to Your Accountant Before the Budget, Not After

Any accountant handling investor clients will be booked solid from 13 May onwards. Book time before 12 May to walk through your portfolio under the current rules, with explicit scenarios for the two-property cap and the CGT discount cut. The post-budget conversation is then about reviewing a decision, not starting one from scratch.

The Bottom Line

The budget might include a two-property cap. It might include a CGT discount cut. It might include both. It might include grandfathering. It might not. You will know at 7:30pm on 12 May.

What does not change on budget night is your underlying cash flow position on each property you hold. If you already know exactly what each property earns and costs, on both a before-tax and after-tax basis, every reform scenario is a number you can plug in, not a crisis. If you do not, the work to get there starts now, not on 13 May.

This post is pre-budget commentary. It is not tax advice. Every investor situation is different, and the specific consequences of any reform depend on your marginal tax rate, portfolio structure, loan arrangements and acquisition dates. A registered tax agent is the only person qualified to advise on your specific position.

propkt tracks rental income, deductible expenses and depreciation on every property in your portfolio, so the net position and the tax summary are already in front of you before you sit down with your accountant. Start tracking for free with your first property.

Frequently Asked Questions

When is the 2026-27 federal budget being handed down?

Treasurer Jim Chalmers will deliver the 2026-27 federal budget at 7:30pm AEST on Tuesday 12 May 2026. This is the scheduled date at which any negative gearing or CGT discount changes would be announced if they are proceeding.

What is the two-property negative gearing cap being modelled?

Treasury is modelling a cap that would limit negative gearing to the first two investment properties held by an investor. Rental losses on third or subsequent properties would be quarantined against other rental income instead of being deductible against salary. The Parliamentary Budget Office has costed a version of this proposal at $5.8 billion in savings over the forward estimates.

Will grandfathering apply to existing investment properties?

Grandfathering is widely expected but not confirmed. Based on Labor's 2019 proposal and commentary from MPs including Rob Mitchell and senators including David Pocock, any new rules would most likely only apply to properties purchased after a start date. Existing properties would continue under current rules until sold. This is not guaranteed though. Do not assume grandfathering is locked in until it is in the budget papers.

How many properties does the average Australian investor own?

There are approximately 2.26 million Australians who own investment property, and roughly 640,000 of them own two or more properties according to ATO data. The two-property cap is designed to capture the top end of that distribution while leaving most mum-and-dad investors unaffected by the cap itself.

What would happen to the CGT discount for property?

Treasury is reportedly modelling a reduction from the current 50% CGT discount to 33% on residential investment property specifically, while retaining 50% on shares and other assets. A separate proposal in the debate would return to cost base indexation, the method used from 1985 to 1999, taxing only real gains above inflation.

Should I sell my investment property before the budget?

Selling in the three weeks before a budget announcement is usually a bad idea. Transaction costs and CGT on the sale will almost always be larger than the risk-weighted value of any tax change, especially if grandfathering applies. The better move is to know your exact cash flow and tax position on each property so you can respond to whatever is announced from a position of information, not panic.

Does this affect investors with only one property?

Under the two-property cap as currently modelled, investors with one or two properties would see no change to their negative gearing position. A separate CGT discount reduction could still affect them at sale, and any changes to general rental deduction rules would still apply. The cap itself bites on property three and above.