The budget fine print that could cost property investors thousands

10 hours ago 2

New homes have emerged as a budget winner with tax carve-outs on offer to investors purchasing a newly built property. But there’s a major catch that could prove costly for unwitting investors.

In terms of the new tax treatment, not all newly built properties are equal.

According to the budget papers, only new homes that “genuinely add to supply” are eligible for negative gearing and the 50% capital gains tax discount.

That means a knockdown rebuild that doesn’t increase the number of dwellings on that block does not qualify. Or put another way - demolish an old home, and it must be replaced with at least two.

Nor does a new apartment qualify if it has not increased the total number of dwellings.

For example, a boutique complex of six three-bedroom apartments that replaced an older block of 12 one-bedroom units would not be considered a new build for the purpose of the budget tax changes, a Treasury spokesperson has confirmed to realestate.com.au.

There would now be 18 bedrooms in total, up from 12, but the number of dwellings on the block has reduced.

The federal budget's definition of what makes a home 'new' could catch unwitting investors out. Picture: Getty

The government’s crackdown on investor taxes aims to boost new housing supply by encouraging more investors to move away from the existing housing market and towards new builds instead.

Under the new rules, negative gearing and the 50% capital gains tax discount will only apply to investors purchasing newly built homes. That is, unless they haven’t increased supply.

It’s a technicality that could catch investors out, particularly in locations where land is in scarce supply.

REA Group senior economist Anne Flaherty said most new housing supply tends to be skewed towards the inner city and outer growth areas, leaving investors with fewer options in established middle-ring areas.

"This tendency is behind the trend known as the ‘missing middle’. In other words, a lot of middle ring established suburbs with excellent infrastructure, such as schools, hospitals, shopping and transport networks are not seeing enough of a meaningful rise in housing supply," she said.

Many owners are adding granny flats to their property, though this does not qualify for new home tax carve-outs under the latest budget. Picture: realestate.com.au

"The kinds of projects that often don’t stack up in the current market are median priced high density living due to the high cost of construction."

And that means fewer developers targeting these established locations, with owner occupiers and investors looking to add value through renovations or granny flats instead. The budget states these do not qualify for tax carve-outs.

The government has released a fact sheet detailing some examples where a new dwelling would not be considered ‘new’ under the new tax treatment.

Source: 2026-27 Federal Budget, Treasury

Eligible new build	Not an eligible new build
A duplex constructed through a knock-down rebuild replacing a single, free-standing house	A free-standing house constructed through a knock-down rebuild replacing an older free-standing house.
Any residential construction on previously vacant land.	A granny flat built adjacent to an established property that is not eligible for negative gearing.
A newly constructed apartment bought off-the-plan	An established property that has recently been extended to add additional bedrooms.
A newly built property which is occupied for less than 12 months before being first sold.	A newly built property which is occupied for more than 12 months before being sold to a subsequent investor.

Modelling from economists at the Commonwealth Bank shows the potential annual cashflow hit to investors unwittingly caught out could be several thousands of dollars.

An investor purchasing a new apartment for $650,000 might receive an upfront tax benefit of almost $5,000 a year with negative gearing, or more than $10,000 for a $1 million property. This assumes a marginal tax rate of 39% including the Medicare levy.

Under the new system, that upfront benefit would no longer be available for a new build that hasn’t increased supply.

CBA modelling shows the potential lost upfront tax benefit without negative gearing:

Capital gains would also be taxed under the new inflation indexation model, rather than having the option to use the blanket 50% discount.

CBA senior economist Trent Saunders said the lifetime cost could be noticeably less due to the ability to carry forward losses.

“Some of the tax benefit may therefore still be realised later. This benefit is delayed, less valuable in present-value terms, and no longer helps investors fund annual holding costs,” Mr Saunders said.

Investors urged to do their research

Buyer’s agent and president of the Property Investment Professionals of Australia, Cate Bakos, said the budget would likely funnel more investors towards purchasing new, but said there are many risks to consider.

“There are a few things that investors need to be really mindful of, the first one is the risks associated with buying off-the-plan,” Ms Bakos said.

“If you can't physically walk through it, if you haven't been able to see it before you buy it, can you be absolutely certain that you're getting what you think you're getting?”

A newly built duplex that has replaced a single dwelling has genuinely added to supply, according to the budget papers. Picture: realestate.com.au

Even if a property qualifies as new under the budget definition, she said investors should factor in the future buyer pool when they choose to eventually sell.

“The issue with the government only giving full negative gearing benefits to brand new properties is that the intrinsic value of that property only exists while the first owner owns it.

“Because you're selling a second-hand property that will not come with the same [tax] benefit for the next buyer, so you can't expect to get the same price for it. Don’t pay a premium.”

Buyer’s advocate Cate Bakos says investors should do their research before purchasing new.

Ms Flaherty likened the concept to purchasing a brand new car.

“Just as a vehicle typically loses value the moment it's driven out of the dealership, a newly built investment property may now experience a similar value drop the moment it is purchased,” she said.

“The reason is simple: a property is only ever new once.

“In other words, because the tax benefits don’t transfer with the property once it's sold, the property is likely to become less appealing to future investors.”

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