The Government’s proposed changes to property tax settings, particularly negative gearing and Capital Gains Tax (CGT), have significant implications for current and aspiring property buyers in Sydney’s Inner West and beyond. In this article, we explain what is being discussed, why these settings are under pressure, and what prudent buyers should consider now from a risk, timing, and strategy perspective.
Why negative gearing and CGT are under review
The Government made a clear pre-election commitment to address housing affordability and therefore has a democratic mandate to intervene in settings it considers to be inflating investor demand, and in turn, placing upward pressure on prices.
Negative gearing and the CGT discount have long been central pillars of Australia’s residential investment landscape, shaping both investor behaviour and price dynamics in markets such as Sydney’s Inner West.
Negative gearing allows investors to offset rental losses (interest and other deductible costs exceeding rental income) against wage and salary income, reducing their overall tax bill.
The CGT discount permits individuals to reduce taxable capital gains on assets held for more than 12 months by 50 per cent, including on investment properties. For example, if an investor realises a gain of $200,000, only $100,000 is included in assessable income under the existing system.
These concessions have attracted growing scrutiny on several fronts. Certain economists, think tanks and parliamentary committees argue that the combination of negative gearing and the CGT discount encourages leveraged investment in existing housing stock, contributes to higher land values and may exacerbate intergenerational inequality by advantaging older and higher income households. Scenarios have been modelled where these concessions are scaled back, including proposals to phase out negative gearing beyond the first or second investment property and to reduce the CGT discount.
For buyers in Sydney, these debates are not abstract. The Inner West is characterised by high acquisition prices, substantial land values and meaningful investor participation, so marginal changes in after‑tax returns can alter both demand and willingness to pay.
What is currently being discussed
The Federal Budget is scheduled to be delivered at 7.30am on Tuesday 12 May, 2026. It is shaping as a “tax reform budget” and whilst there is no certainty that CGT and negative gearing changes will be formally announced, the budget is likely to signal direction and intent with exact details to follow.
The current policy conversation has several strands, some of which are more developed than others.
Key discussion points include:
- Reducing the CGT discount on investment property
The Government is examining reducing the CGT discount from 50% to 30 – 33% or even abolishing the discount entirely. From a buyer’s perspective, any reduction in the discount increases the eventual tax on capital growth and therefore reduces the effective after‑tax return on equity over the investment horizon. - Differentiating between new and existing housing
One approach that has attracted attention is to maintain or even enhance the CGT discount on new constructions while reducing it for older or established properties, as a way to direct capital towards adding supply. Policy think tanks have proposed models where new dwellings could receive a higher discount rate, with existing properties receiving a lower discount, thereby encouraging additional housing stock rather than speculative trading of existing homes. - Targeted restriction or phasing out of negative gearing
Several proposals have been costed over recent years to phase out negative gearing beyond the first or second investment property and simultaneously tighten CGT concessions for multi‑property investors. Earlier national policy debates also contemplated limiting negative gearing to new dwellings and reducing the CGT discount for all investors, although those specific proposals were not implemented. The underlying theme is to reduce the extent to which highly leveraged investment in existing stock is subsidised through the tax system. For leveraged buyers in Sydney’s Inner West, which typically features relatively low rental yields relative to purchase price, limits on negative gearing would increase the after‑tax cost of holding an investment property, especially in the early years when interest costs are high. - Interaction with broader property tax reform
At state level, New South Wales has been exploring structural changes to transaction and holding taxes, including options for replacing upfront stamp duty with an annual property tax, and offering first home buyers a choice between duty and annual tax in certain value bands. While separate from federal negative gearing and CGT reforms, any state developments would interact with the overall tax burden on property ownership, particularly for owner‑occupiers and first home buyers in Sydney. - Grandfathering existing arrangements
A key feature under consideration is “grandfathering” whereby any changes to CGT or negative gearing would only apply to future purchases leaving existing investments largely untouched. Investors who already own property would continue to benefit from the current tax settings while new acquisitions would fall under the revised regime.
Indications point towards a reform direction where leveraged investment in existing established stock is less heavily subsidised, and where tax settings increasingly differentiate between new supply and existing dwellings.
Although no final decisions are expected until after the Budget, it is useful for buyers to understand the types of mechanisms that are being canvassed so that they can scenario‑plan their strategies.
Possible consequences for the Sydney and Inner West market
The impact of any reforms will depend heavily on final design, timing, and whether existing investments receive grandfathering treatment. Nonetheless, Australian and international evidence offers some guidance on likely directional effects.
Investor demand and pricing
Modelling by various independent bodies indicates that phasing out negative gearing and reducing the CGT discount for residential investors would be expected to modestly reduce investor demand and place some downward pressure on prices relative to the status quo. Official commentary has indicated that the impact on housing supply would likely be limited, depending on how reforms are structured, although price growth and investor activity could moderate.
In markets with high investor participation, such as parts of Sydney, there is a reasonable expectation that:
- Investor appetite for highly leveraged acquisitions, especially of existing apartments and older houses, may ease if after‑tax returns decline.
- Owner‑occupiers and first home buyers could face slightly less competition at auction and in private treaty campaigns, particularly at price points historically favoured by investors.
However, because price dynamics also depend on interest rates, credit availability, population trends and supply constraints, tax changes alone are unlikely to produce dramatic price falls in established, supply‑constrained suburbs with broad home-owner appeal such as the Inner West.
Rents and rental supply
A common concern is that restricting negative gearing will cause investors to exit the market and push rents higher. Some of the available modelling is more nuanced:
- Many analyses suggest that phasing out negative gearing and reducing CGT concessions is likely to have modest effects on rents in the long run, with outcomes sensitive to whether new construction receives favourable treatment.
- If reforms are designed to incentivise new supply (for example by preserving higher CGT discounts or negative gearing for new dwellings), then rental availability in growth corridors and infill locations could improve, offsetting upward pressure on rents.
In the Inner West, where build‑to‑rent projects and medium‑density infill are increasingly prominent in planning frameworks, tax settings that favour new construction may support longer‑term rental supply while slightly moderating demand for existing stock.
Behavioural timing effects
When governments signal forthcoming changes to CGT or negative gearing, markets often experience transitional behaviour:
- Some investors bring forward purchases to secure grandfathered treatment, particularly if existing holdings are exempt from new rules.
- Others accelerate sales if they expect higher future tax liabilities or if holding costs will increase under new rules.
This can temporarily affect listing volumes, auction clearance rates and negotiation leverage for buyers. For example, if proposed changes treat contracts exchanged before a specified date under old rules, there may be a short window in which motivated vendors and deadline‑driven buyers transact on compressed timelines.
What do property buyers need to know now?
In a context of policy uncertainty, buyers should focus on robust strategy and risk management rather than speculative timing alone. We outline several considerations for different buyer profiles.
Owner‑occupiers in Sydney’s Inner West
Changes to CGT and negative gearing are of direct concern to investors, not home owners:
- Principal Place of Residence (PPOR) status generally preserves CGT‑free treatment, so CGT discount changes are less central for pure owner‑occupier buyers.
- Against this backdrop, the PPOR takes on even greater strategic importance and there is a compelling case for prioritising capital allocation into the family home, particularly in tightly held, high-demand suburbs in the Inner West, Eastern Suburbs and Lower North Shore. This is also becoming increasingly relevant across infill locations in these areas where ongoing densification and redevelopment are steadily reducing the overall supply of freestanding houses. With fewer standalone dwellings available and long-term demand continuing to intensify, scarcity is only likely to become more pronounced further reinforcing the long-term capital upside and tax efficiency of owner-occupied housing.
We encourage owner‑occupiers to prioritise property fundamentals: Location, school zones, transport, renovation potential and long‑term suitability, rather than reacting aggressively to speculative CGT adjustments that may not apply to the family home.
First home buyers weighing structure and timing
First home buyers benefit from first home buyer incentives whilst also facing Federal tax settings (which influence investor competition) as well as evolving New South Wales policies on stamp duty versus annual property tax.
Key issues to consider include:
- Whether proposed CGT and negative gearing changes could reduce investor competition in the price bracket under consideration, potentially improving negotiation conditions over the medium term.
- Whether New South Wales property tax options (such as an annual tax instead of upfront duty for eligible first home buyers) can enhance borrowing capacity or cash flow in the early years.
- The risk of overextending financially when interest rate and personal income shocks are typically more material to long‑term affordability than tax settings alone.
A measured approach is to model scenarios with an independent adviser, including conservative assumptions about future rents, interest rates and possible tax settings, and to ensure buffers for owner‑occupier costs and lifestyle.
Investors
For investors, prospective changes to negative gearing and the CGT discount are central to after‑tax returns and therefore to portfolio construction. We recommend that investors consider:
- Stress‑testing cash flow
Model investments on the basis that the ability to offset rental losses against salary income may be curtailed beyond one property, or restricted to new dwellings only. This means ensuring that the investment remains viable on a near cash‑neutral or positively geared basis over the medium term, rather than relying on indefinite tax losses to support holding costs. - Planning for higher CGT on exit
Assume that CGT concessions may be reduced for properties acquired after a future cut‑off date, and build this into hold‑period and disposal strategies. Investors should assess whether anticipated capital growth in tightly held suburbs such as the Inner West compensates for a potentially higher effective tax rate on gains at sale. - Prioritising asset quality and scarcity
If tax advantages are diluted, the underlying investment case must rely more heavily on quality, scarcity and rental demand. Period homes, well‑located terraces and quality strata in transport‑rich locations within the Inner West may maintain stronger rentability and value resilience than generic, oversupplied investor grade stock. - Considering new versus existing dwellings
If reforms ultimately favour new housing (through higher CGT discounts or preserved negative gearing), investors may find relatively better after‑tax outcomes in high‑quality new stock, provided that location, build quality and strata settings are robust.
Practical steps buyers can take today
Even while policy remains in flux, there are pragmatic actions that buyers can take to position themselves sensibly.
- Seek personalised tax advice before committing
Given the technical nature of CGT and negative gearing, and the possibility of grandfathering provisions, buyers should obtain advice from a registered tax adviser or accountant who is familiar with proposed reforms and can model specific scenarios based upon your circumstances. - Avoid over‑reliance on tax benefits in feasibility calculations
When appraising a property, treat tax concessions as an upside rather than a core pillar of feasibility. The investment should make sense on fundamentals: sustainable rent, reasonable outgoings, realistic vacancy assumptions and conservative capital growth expectations. - Monitor Budget announcements and parliamentary processes
The forthcoming Federal Budget, consultation papers and official modelling will clarify the direction and timing of reforms. Buyers should note any proposed commencement dates, transitional rules based on contract exchange dates, and differentiation between new and existing dwellings. - Build flexibility into finance structures
Work with lenders and advisers to secure loan structures that allow for extra repayments, offset accounts and the capacity to reduce leverage over time if holding costs rise due to changes in tax treatment. This is particularly relevant for investors holding multiple properties who may face new limits on deductibility of losses. - Engage specialist buyers’ agents for strategic acquisition
In a shifting policy environment, experienced buyers’ agents can assist in identifying suitable blue chip assets that are resilient to tax changes, negotiating appropriate pricing that reflects emerging risks, and navigating time‑sensitive opportunities in cases where grandfathering or transitional rules apply.
How we assist buyers in an evolving tax landscape
At Buyer’s Domain, we specialise in representing home buyers and investors in Sydney’s Inner West and beyond, with a focus on aligning acquisition strategy with evolving policy and tax settings. While we do not provide tax advice, we work closely with our clients’ tax and financial advisers to ensure that property selection, price negotiation and risk assessment are consistent with current and prospective rules on negative gearing and CGT.
Our role typically includes:
- Identifying suburbs and asset types where long‑term fundamentals are likely to remain strong, even if tax concessions are diluted.
- Assessing local supply pipelines and planning frameworks, which interact with any reforms designed to favour new construction.
- Negotiating favourable purchase terms and timing, particularly where vendors may be motivated due to perceived changes in tax treatment.
We encourage buyers to treat policy change as one factor in a broader decision‑making framework, rather than as the sole driver of purchase timing. A disciplined focus on property quality, financial resilience and professional advice is likely to remain the most reliable path to successful outcomes in Sydney’s complex market, regardless of how the detail of negative gearing and CGT reform ultimately unfolds.
