Capital Gains Tax (CGT) Discounts on Investment Properties

If you're thinking about investing in Australian property, understanding how Capital Gains Tax (CGT) works is crucial to your investment strategy. Right now, the 50% CGT discount means you only pay tax on half your profit when you sell an investment property you've held for more than 12 months. But that's about to change. With the federal government considering major reforms to this discount ahead of the May 2026 budget, property investors need to understand what's at stake and how these changes could affect their portfolios.

What is Capital Gains Tax and How Does it Work?

Capital Gains Tax is the tax you pay on the profit you make when you sell an asset for more than you paid for it. In Australia, the way you calculate your CGT liability depends on how long you've held the asset.

Here's how it currently works:

• Assets held under 12 months: You pay tax on the full capital gain at your marginal tax rate
• Assets held over 12 months: You only pay tax on 50% of the capital gain at your marginal tax rate (this is the CGT discount)
• Primary residence: Completely exempt from CGT
• Pre-1985 assets: Completely exempt from CGT

The 50% discount was introduced in 1999 by the Howard government as a way to compensate for inflation on assets held over time. It applies to all capital assets including investment properties, shares, ETFs, and cryptocurrency.

A Practical Example

Let's say you purchase an investment property for $500,000 and sell it five years later for $800,000. Your capital gain is $300,000. Under current CGT rules, you'd only be taxed on $150,000 of that gain at your marginal tax rate. If you're in the 39% tax bracket (including Medicare levy), you'd pay around $58,500 in tax rather than $117,000.

The Proposed CGT Changes Coming in 2026

The federal government is seriously considering slashing the CGT discount from 50% to 25% as part of housing affordability reforms. Treasurer Jim Chalmers has indicated the government is "alive to the intergenerational issues in the housing market and in the tax system," signalling changes could be announced in the May 2026 federal budget.

What Would Change?

If the proposal goes ahead, here's what you need to know:

• The CGT discount would be cut from 50% to 25% for assets held over 12 months
• This would be the first major CGT reform since the tax was introduced in 1985
• The change would apply to property, shares, and other capital assets
• The exact timing and implementation structure remain unclear

Some speculation suggests the discount could drop even further to 33%, and there's discussion about capping the number of negatively geared properties investors can claim.

The Financial Impact on Your Investment

Using our $500,000 property example again: if the CGT discount is reduced to 25%, you'd be taxed on $225,000 of your $300,000 gain instead of $150,000. At a 39% tax rate, that's around $87,750 in tax—a difference of nearly $30,000 compared to current rules.

The Parliamentary Budget Office estimates the current 50% CGT discount costs the federal budget $247 billion in forgone revenue over the next 10 years. In 2024–25 alone, the discount cost an estimated $19.7 billion.

Why is the Government Considering These Changes?

The push to reduce the CGT discount stems from concerns about Australia's housing affordability crisis. Economists, unions, and advocacy groups argue that the generous tax treatment of investment properties encourages investors to compete with first-home buyers, driving up prices and reducing housing supply.

The argument goes that by making property investment less attractive from a tax perspective, more properties could be available for owner-occupiers, and fewer rental properties would be removed from the market.

What Could Happen to the Property Market?

Property groups and investors have warned that CGT changes could have significant market consequences. The Property Investment Professionals of Australia (PIPA) conducted a survey showing that if CGT reforms proceed, one in three investors could be pushed to sell their properties.

Potential Market Impacts

Supply will likely tighten: Existing property investors may hold properties longer rather than sell, even underperforming ones, to preserve tax efficiency. When supply contracts while demand remains strong, prices and rents typically rise.

Transaction volumes could drop: Many property investors may stop buying and selling to protect their tax advantages, reducing market activity and available stock.

Rental market pressure: PIPA's chair Cate Bakos warned that "every investor who sells to an owner-occupier removes a rental home from the system and tenants are the ones who suffer the consequences." With national vacancy rates already critically low at 1.4%, this is a serious concern.

Mixed views on first-home buyers: While some argue reduced CGT discounts would help first-home buyers by reducing investor competition, the Opposition argues it won't actually increase housing supply.

What Should Property Investors Do Now?

Until changes are formally announced and legislated, there's uncertainty about timing and implementation. However, savvy investors are already considering their options:

• Review your portfolio: Assess which properties have significant unrealised gains and consider whether selling before any changes take effect makes financial sense
• Understand grandfathering: If changes proceed, there may be grandfathering provisions that protect properties purchased before a certain date. Details remain unclear
• Consult a tax professional: A qualified accountant or tax advisor can help you model different scenarios and plan accordingly
• Consider your investment timeline: If you're holding for long-term wealth building, the timing of any changes may matter less than your overall strategy
• Monitor budget announcements: Keep an eye on the May 2026 federal budget for official details

Other Changes Affecting Property Investors in 2026

CGT isn't the only thing changing for property investors this year. Several grants and concessions are expiring:

• Queensland's $30,000 First Home Owner Grant (FHOG) closes in June 2026
• Victoria's stamp duty concessions for off-the-plan apartments, units and townhomes run until October 2026
• The Northern Territory has extended its HomeGrown build grants until September 2027

What Comes Next?

The next major announcement will likely come in the federal budget in May 2026. If you're a property investor, now's the time to get your financial records in order and speak with a tax professional about how potential changes could affect your portfolio. While uncertainty is frustrating, remember that investment decisions should be based on your long-term goals, not short-term tax speculation.

Keep monitoring official government sources like the Australian Taxation Office (ATO) website and treasury announcements for updates. In the meantime, focus on properties that provide solid rental returns and long-term capital growth, regardless of tax changes.