Published 12 May 2026 | Last reviewed 12 May 2026 by John Pierre Saliba
The May 2026 Budget at a Glance for Property Investors
Every budget cycle brings speculation about negative gearing and the CGT discount. This year is no different. I have read the budget papers so you do not have to. Below is a plain-language summary of every measure that matters if you own, or plan to own, investment property in Sydney.
The headline for investors: negative gearing and the 50% CGT discount are both retained. If you have been sitting on the sidelines waiting for policy clarity before purchasing or refinancing, this budget removes that uncertainty for the current term of government. Act on structure and rates, not fear of policy change.
Negative Gearing: Status Confirmed, No Changes
Negative gearing remains fully intact. If your investment property's deductible expenses (interest, council rates, insurance, management fees, repairs, depreciation) exceed your rental income, the resulting loss continues to offset your other taxable income, including salary and wages.
This means:
- Loan interest on investment property remains fully tax deductible
- There is no cap on the number of negatively geared properties you can hold
- No grandfathering provisions were introduced (because no changes were made)
- Interest-only loan structures remain a valid strategy for maximising deductions
For Sydney investors, where yields sit between 2.5% and 3.5% on most inner-city apartments and houses, negative gearing remains the primary mechanism that makes the after-tax holding cost manageable while you benefit from long-term capital growth.
David's Surry Hills Investment Property
David owns an investment property in Surry Hills worth $1.2M with $800K remaining on an interest-only loan at 6.2%. Here is his annual position:
- Annual interest cost: $800,000 x 6.2% = $49,600
- Other deductible expenses: council rates $2,100, water $1,200, strata $4,800, insurance $1,600, property management $3,900, repairs $1,500 = $15,100
- Total deductible expenses: $64,700
- Annual rental income: $780/week = $40,560
- Net rental loss: $64,700 minus $40,560 = $24,140
David's taxable income from his day job is $180,000. The $24,140 loss reduces his assessable income to $155,860. At his marginal rate of 37% (plus 2% Medicare levy), that negative gearing saves him approximately $9,415 in tax each year.
If negative gearing were limited (for example, capped at $10,000 per year): David could only offset $10,000 of his $24,140 loss. The remaining $14,140 would carry forward, reducing the immediate tax benefit from $9,415 to approximately $3,900. His annual out-of-pocket holding cost would increase by roughly $5,500. This scenario did not happen in the 2026 Budget.
Capital Gains Tax: 50% Discount Retained
The 50% CGT discount for individuals who hold an asset for at least 12 months is unchanged. When you sell an investment property, you include only half of the net capital gain in your assessable income. This has been the rule since September 1999, and it remains in place.
Key points:
- The 12-month holding period requirement is unchanged
- Companies do not receive the discount (they never have)
- SMSFs receive a one-third (33.33%) CGT discount, also unchanged
- Foreign residents remain ineligible for the CGT discount on disposals after 8 May 2012
Lisa Sells Her Marrickville Investment
Lisa bought an investment property in Marrickville for $950,000 in 2023 and sells in 2026 for $1,150,000. She held the property for more than 12 months.
- Purchase price: $950,000
- Selling costs (agent, legal): $28,000
- Capital improvements (new kitchen): $22,000
- Cost base: $950,000 + $28,000 + $22,000 = $1,000,000
- Capital gain: $1,150,000 minus $1,000,000 = $150,000
- After 50% discount: $75,000 included in assessable income
Lisa's other taxable income is $120,000. Adding $75,000 takes her to $195,000. The marginal rate on income between $135,001 and $190,000 is 37%, and above $190,000 is 45%. Her approximate CGT liability is roughly $30,375 (plus Medicare levy).
If the CGT discount were reduced to 25%: Lisa would include $112,500 instead of $75,000. Her tax on the gain would increase by approximately $16,875. This scenario did not occur in the 2026 Budget.
Depreciation Rules: No Change
The depreciation framework for investment property remains as follows:
- Division 43 (building allowance): 2.5% per year of the original construction cost for properties built after 15 September 1987. Available on both new and second-hand properties.
- Division 40 (plant and equipment): Carpets, blinds, hot water systems, ovens and similar items. For properties purchased second-hand after 9 May 2017, the original owner's plant and equipment depreciation deductions cannot be claimed by the subsequent buyer. New properties are unaffected.
If you are buying a new or off-the-plan investment property, you still benefit from full plant and equipment depreciation. I recommend commissioning a quantity surveyor's depreciation schedule before your first tax return. The cost (typically $600 to $800) is itself tax deductible, and the schedule often identifies $8,000 to $15,000 in first-year deductions on a new Sydney apartment.
Land Tax: NSW State Budget Applies
Land tax is a state matter, not a federal one. The Federal Budget does not set land tax rates. In NSW for 2025-26:
- Threshold: $1,075,000 (combined land value of all investment properties, excluding your principal place of residence)
- Rate: $100 plus 1.6% of land value above the threshold, up to the premium threshold
- Premium rate: 2.0% on land value above $6,571,000
- Surcharge: Foreign owners pay an additional 4% surcharge (see below)
Land tax is assessed annually on 31 December land values. If you are building a portfolio, the combined land value of all your investment holdings determines your liability. Structuring ownership (individual, company, trust, SMSF) affects your land tax position. Discuss this with your accountant before purchasing additional properties.
Interest Deductibility: Fully Preserved
All interest charged on a loan used to purchase, build or improve an investment property remains fully deductible against rental income and, where a loss results, against your other income. This applies to:
- Variable rate loans
- Fixed rate loans
- Interest-only loans
- Line of credit facilities (to the extent the draw is for investment purposes)
- Loans split between investment and personal use (only the investment portion is deductible)
The critical rule: the purpose of the borrowed funds determines deductibility. If you refinance and redraw for personal use (holiday, car, living expenses), that portion of interest is not deductible. Loan structuring matters. I help investors set up split facilities specifically to preserve full deductibility.
Foreign Investment Rules: Tightened Further
The 2026 Budget continues the tightening of rules for foreign investors:
- Vacancy fee doubled: Foreign owners of residential property that is not genuinely occupied or available for rent face increased vacancy fees
- FIRB application fees increased: Screening fees for foreign acquisitions of residential property have risen
- Surcharge buyer duty (NSW): Remains at 8% for foreign purchasers
- Surcharge land tax (NSW): Remains at 4% for foreign owners
- CGT discount: Foreign residents remain ineligible for the 50% discount on properties acquired after 8 May 2012
If you are an Australian permanent resident or citizen, these changes do not affect you. If you are purchasing through a foreign-owned entity or trust with foreign beneficiaries, speak to a tax adviser about the structure before proceeding.
SMSF Property Investors: What Changed
The most significant change affecting SMSF property investors is the Division 296 tax on super balances above $3 million. From 2025-26, earnings (including unrealised capital gains) attributable to the portion of your total super balance exceeding $3 million will be taxed at 30% instead of the standard 15%.
For SMSF property specifically, this matters because:
- Unrealised gains are included: If your SMSF holds a property that has appreciated significantly, the unrealised gain on the portion of your balance above $3M contributes to your tax liability, even if you have not sold
- Illiquid asset problem: Property cannot be partially sold. If your SMSF needs to pay Division 296 tax on unrealised gains, the cash must come from elsewhere in the fund
- LRBA implications: If you have a Limited Recourse Borrowing Arrangement, the outstanding loan balance reduces your member balance for the $3M threshold calculation, which may help in the short term
- Pension phase is affected: Even pension-phase earnings are subject to Division 296 if the member's total super balance exceeds $3M
If your SMSF balance is approaching $3M and you hold property via an LRBA, now is the time to review your strategy with your financial adviser and accountant. The lending side, rates, LVRs and loan terms, I can help with. But the decision about whether to hold, sell or restructure is a financial planning and tax question that requires specialist advice.
Refinancing Strategy for Investors Post-Budget
With negative gearing and the CGT discount confirmed, the policy environment is stable. That means the most impactful thing you can do as an investor right now is review your loan structure and rate. Here is what I am seeing across my investor clients in May 2026:
1. Rate Review
If you have not refinanced in the last 18 months, you are almost certainly paying more than you need to. Investor variable rates from competitive lenders are sitting between 5.89% and 6.39% depending on LVR, loan size and whether the loan is interest-only or principal-and-interest. Many of my clients who refinanced in Q1 2026 saved between $2,400 and $6,000 per year.
2. Interest-Only Review
If your interest-only period has expired and you have rolled onto principal-and-interest repayments, your cash flow has changed materially. For an $800,000 loan at 6.2%, the difference between IO and P&I repayments is approximately $1,800 per month. If you still want IO, we can refinance to a lender offering a new IO term (typically 5 years for investors).
3. Equity Release for Next Purchase
If your existing property has grown in value, you may be able to access equity to fund the deposit on your next investment. Most lenders allow borrowing up to 80% of your property's current value (90% with LMI). The equity release is structured as a separate split so deductibility is clean. Use our Equity Calculator to estimate what is available.
4. Loan Structure Audit
Common issues I find in investor loan reviews:
- Investment and personal portions mixed in one loan (contaminates deductibility)
- Offset account attached to the investment loan instead of the owner-occupied loan (reduces deductible interest unnecessarily)
- Cross-collateralisation between investment and home (gives the lender more control than necessary)
- Fixed rate that expired 12+ months ago, now sitting on a high revert variable rate
A proper structure review takes 30 minutes and costs nothing. Book a session and bring your latest loan statements.
Budget Summary Table
| Measure | Status | Impact on Investors |
|---|---|---|
| Negative gearing | Unchanged | Full deductibility of rental losses against all income retained |
| 50% CGT discount | Unchanged | Half of net capital gain included in assessable income (12+ month hold) |
| Depreciation (Div 43) | Unchanged | 2.5% building allowance for post-1987 properties |
| Depreciation (Div 40) | Unchanged | Second-hand restriction (post May 2017) still applies |
| Interest deductibility | Unchanged | All investment loan interest fully deductible |
| Super tax ($3M+) | Changed | 30% tax on earnings above $3M balance (incl. unrealised gains) |
| Foreign vacancy fee | Increased | Higher penalties for vacant foreign-owned residential property |
| FIRB fees | Increased | Higher screening fees for foreign residential acquisitions |
What This Means for Sydney Specifically
Sydney's investment property market operates differently to most Australian capitals because of its higher entry prices, lower yields and stronger long-term capital growth. With the policy settings confirmed:
- Inner ring (Surry Hills, Newtown, Marrickville, Balmain): Yields remain tight at 2.5% to 3.2%. Negative gearing is essential to the holding strategy. The policy confirmation supports continued demand.
- Middle ring (Strathfield, Burwood, Canterbury, Hurstville): Yields slightly higher at 3.0% to 3.8%. Better cash flow position but still typically negatively geared at current rates.
- Apartments vs houses: Houses offer stronger land-value growth but deeper negative gearing. Apartments offer better yields but limited depreciation on second-hand stock. New apartments still offer full depreciation benefits.
- Regional NSW: Higher yields (4.0% to 5.5%) mean some investors are neutrally or positively geared. The CGT discount is the main federal policy relevant to these holdings on disposal.
Policy stability is itself a growth factor. When investors are confident that the rules will not change mid-cycle, they buy. I expect the confirmation of negative gearing and the CGT discount to support transaction volumes in the second half of 2026, particularly for sub-$1.5M investment stock in Sydney's inner and middle rings.
