Published May 2026 | Dingle Partners — Melbourne’s Inner-City Property Specialists
Budget night on 12 May 2026 delivered the most significant changes to property investment tax settings in a generation. For anyone who owns, is buying, or is considering selling residential property in Melbourne, the rules have shifted — and understanding what actually changed, what didn’t, and what it means in practice is worth taking the time to do properly.
This article sets out the key changes clearly, explains how they are likely to play out in Melbourne’s inner-city market, and offers a practical framework for buyers, sellers and existing investors navigating the new landscape. It is not financial or tax advice — anyone with an existing investment portfolio or an active purchase decision should speak with their accountant or financial adviser about their specific circumstances. But the market-level picture is one that every Melbourne property owner and buyer should understand.
It is also worth noting that at the time of writing, these measures have been announced in the Budget but have not yet been legislated. The political pathway matters — particularly given opposition from the Liberal Party — and there remains some possibility that the measures are modified or delayed before becoming law. That said, the weight of current expectation is that the core changes will proceed broadly as announced.
What Changed: The Core Budget Measures
Negative Gearing Is Being Restricted for Established Properties
This is the headline change. From 1 July 2027, negative gearing on established residential properties purchased after 7:30pm AEST on 12 May 2026 will be restricted. Under the new rules, rental losses on affected properties can no longer be offset against salary or wages — they can only be offset against other residential rental income, or carried forward to offset future capital gains from residential property.
In practical terms, this means an investor who buys an established apartment today, where rental income doesn’t cover mortgage repayments and costs, can no longer use that shortfall to reduce their personal tax bill. They can still claim the loss — it just gets quarantined until it can be applied against residential property income or gains.
Three important carve-outs apply:
Existing holdings are grandfathered. Properties already held — or already under contract — before 7:30pm on 12 May 2026 retain full access to negative gearing under the current rules. Nothing changes for existing investors on their existing holdings.
New builds are fully exempt. Newly constructed properties that genuinely add to housing supply — including off-the-plan apartments, knock-down rebuilds that increase dwelling numbers, and new construction on vacant land — retain access to negative gearing and the existing CGT discount. The Government’s explicit intention is to redirect investor demand from established stock toward new supply.
Affordable housing providers are exempt. Investors who provide housing under qualifying government affordable housing programs retain existing concessions — an incentive to direct capital toward social and affordable outcomes.
Capital Gains Tax Is Also Changing
The second major reform affects how capital gains are taxed when an investor sells. From 1 July 2027, the existing 50% CGT discount for individuals, trusts and partnerships will be replaced with cost base indexation and a 30% minimum tax on real capital gains.
Under cost base indexation, the purchase price of an asset is adjusted for inflation when calculating the capital gain. In a period of sustained inflation — which is exactly where Australia finds itself — this can be meaningful. However, for properties that have experienced strong nominal capital growth, the effective tax rate under the new arrangements will generally be higher than under the old 50% discount.
Two important exceptions apply: the main residence CGT exemption is unchanged, meaning owner-occupiers selling their primary home are unaffected. And the CGT discount for superannuation funds is not expected to change, preserving the tax efficiency of property held through super.
Critically, investors in new builds can choose between the old 50% CGT discount and the new indexation arrangements when they sell — effectively giving new build investors the best of both worlds.
Other Housing Measures
Beyond the headline tax changes, the Budget included a $2 billion Local Infrastructure Fund to support enabling infrastructure for new housing, an extension of the ban on foreign purchases of established dwellings, and additional support for social and affordable housing. A 100,000 Homes for First Home Buyers program was also announced, aimed at increasing owner-occupier participation in the market over the medium term.
What Does This Mean for Melbourne’s Inner-City Property Market?
The Price Impact Is Real But Moderate — and Uneven
CBA’s analysis expects Melbourne house prices to be approximately 3% lower than they otherwise would have been as a result of the changes, with the effect expected to be gradual rather than immediate. That is a meaningful but not catastrophic shift — particularly when considered against Melbourne’s existing discount to Sydney and the structural undersupply that characterises its inner suburbs.
The price impact is likely to be concentrated in market segments where investor participation is highest — apartments, townhouses and lower-priced established dwellings — rather than owner-occupier-dominated detached housing markets. This is a relevant nuance for inner-city Melbourne, where apartments make up the majority of stock across many of our core precincts.
However, the picture for inner-city apartments is not as simple as the headline suggests. The properties most exposed to downward pressure are those that relied on tax benefits to paper over poor fundamentals — weak yields, high vacancy, undifferentiated stock in oversupplied corridors. Quality established apartments in tightly-held inner suburbs — with strong rental demand, boutique building stock, heritage protection and genuine lifestyle appeal — are a different asset class entirely, and their fundamentals have not changed.
The Lock-In Effect: Less Stock May Come to Market
One of the less-discussed consequences of grandfathering is its effect on supply. Existing investors now have a materially stronger incentive to hold rather than sell, since selling would mean forfeiting their grandfathered negative gearing status on any replacement investment. For a market like Melbourne’s inner city — where available stock in tightly-held precincts is already constrained — this could meaningfully reduce the flow of quality established property to market over the coming years.
The irony is that a policy designed to increase housing availability for owner-occupiers may, in the short to medium term, actually reduce the supply of established stock available for purchase. For buyers in premium inner-city precincts, this is worth factoring into their thinking.
Yield Is Now the Central Investment Metric
For new buyers of established property after Budget night, the investment calculus has fundamentally shifted. Without the ability to offset rental losses against income, the income performance of a property matters more than it ever has — investors can no longer rely on tax concessions to subsidise a weak yielding asset.
This has a direct and significant implication for Melbourne’s inner-city apartment market. Precincts delivering gross yields of 5% to 5.7% — including the St Kilda Road corridor, South Yarra and parts of Carlton — are precisely the kind of assets that become more attractive in a world where cash flow is the primary investment metric. Properties that generate enough rental income to cover or approach covering their costs are no longer just a preference — for investors buying established stock under the new rules, they are a necessity.
In short, quality inner-city apartments in high-yield precincts have just become considerably more valuable relative to the broader investment property market than they were before Budget night.
What Should You Do Now?
If You Are an Existing Investor
Your grandfathered status on existing holdings is a genuine and valuable asset. The negative gearing rules that applied when you purchased continue to apply — nothing about your existing portfolio has changed. What has changed is the cost of selling and reinvesting, since any replacement established property purchased after Budget night loses that grandfathering.
This makes the hold versus sell decision considerably more nuanced than it was before 12 May. For properties with strong fundamentals and good yield, the case for holding has strengthened. For properties being held primarily for capital gain in precincts where the Budget’s price impact may be most felt, the calculus is worth revisiting with your accountant.
If You Are Considering Buying an Investment Property
The fundamental shift is from tax-advantaged speculation toward yield-driven investment. Investors can no longer lazily rely on negative gearing and CGT discounts to paper over a poor purchase — buying mistakes will now hurt more. The premium on asset quality, location and rental fundamentals has increased materially.
For those open to new builds, the tax settings are genuinely favourable — full negative gearing access and the choice of CGT treatment at sale. The trade-off is the higher entry price, elevated construction cost environment, and the additional due diligence required to assess developer quality and building fundamentals.
For established property, the focus should be firmly on yield. Inner-city precincts with structurally tight vacancy, a diverse and stable tenant base, and boutique building stock are where the investment case remains intact. The question to ask of any established property is whether the rental income can carry the asset without relying on a tax deduction against salary — and if the answer is yes, or close to it, the fundamental case is sound.
If You Are Considering Selling
For owner-occupiers, the main residence CGT exemption is unchanged and the Budget has no direct impact on your sale.
For investors with grandfathered holdings who have been considering selling, the timing question has become more complex. The lock-in dynamic means less competing stock from other investors in the same position — which is supportive of price. But the pool of investor buyers for your property has also changed, since purchasers buying after Budget night are working under different tax assumptions. Owner-occupier demand, and the depth of that demand in your specific suburb and price bracket, becomes a more important factor in assessing the likely result.
This is precisely the kind of decision that benefits from hyperlocal market knowledge rather than general analysis. The answer for a well-presented apartment on St Kilda Road is different to the answer for a house in a suburb where investors make up a larger share of the buyer pool.
Frequently Asked Questions
Does the negative gearing change affect properties I already own?
No. Existing investment properties held before 7:30pm AEST on 12 May 2026, including properties already under contract at that time, are fully grandfathered. Your existing negative gearing arrangements are unchanged.
When do the changes actually take effect?
The cut-off date for which properties are affected is 12 May 2026 (Budget night). However, the actual legislative changes to how losses can be deducted — and the CGT changes — take effect from 1 July 2027. The measures also still need to be passed through Parliament before becoming law.
Are new apartments and off-the-plan purchases affected?
No. New builds that genuinely add to housing supply — including off-the-plan apartment purchases, knock-down rebuilds that increase dwelling numbers, and new construction on vacant land — are exempt from the main housing tax changes. Investors in new builds retain full negative gearing access and can choose between the existing 50% CGT discount and the new indexation arrangements when they sell.
What does this mean for Melbourne apartment prices?
CBA’s analysis suggests the combined effect of the negative gearing and CGT changes could see established dwelling prices approximately 3% lower than they otherwise would have been, with the impact most concentrated in apartment and townhouse markets where investor participation is highest. However, quality apartments in tightly-held, supply-constrained inner suburbs with strong rental fundamentals are expected to be more resilient than this headline figure suggests.
Is my home affected by the CGT changes?
No. The main residence CGT exemption is unchanged. Owner-occupiers selling their primary home are unaffected by the Budget’s CGT reforms.
Does this make inner-city Melbourne apartments more or less attractive as investments?
It makes the distinction between good and poor quality apartments sharper than it has ever been. Apartments with strong yields, tight vacancy and genuine rental demand — in precincts like the St Kilda Road corridor, South Yarra and Carlton — become more valuable relative to the broader market in a world where cash flow matters more than tax concessions. Poor performing stock in oversupplied corridors faces real pressure. The budget has not changed what makes a good inner-city apartment investment. It has made the consequences of buying a bad one considerably more painful.
Should I speak to my accountant before making a property decision?
Yes — unambiguously. The changes are significant, the details are complex, and their application to any individual’s specific circumstances depends on factors including portfolio structure, income level, trust arrangements and timing. This article provides a market-level overview, not personal financial or tax advice. For any active investment decision, professional advice is essential.
Dingle Partners has been operating in Melbourne’s inner-city property market since 1973. Our team across six inner-city offices — spanning St Kilda Road, Carlton, Richmond, Southbank, Docklands and the CBD — monitors these conditions daily. If you’d like to understand what the 2026 Budget changes mean for your property or investment goals in the context of Melbourne’s inner-city market, we’d welcome the conversation.
Get in touch with one of our experienced agents from across our office network; or request your obligation free market and property report today.