What the negative gearing changes mean for the client considering a knock-down rebuild

A client walks in with a familiar plan. They own an older house on a well-located block, the building is past the point of a worthwhile renovation, and they are weighing what to do with the site. Until recently, the answer was straightforward. From 1 July 2027, it depends on what gets built.

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 passed Parliament on 25 June 2026. From 1 July 2027, negative gearing on residential property is limited to new builds. The knock-down rebuild conversation firms have had many times before now hinges on a specific test: does the rebuild add to housing supply, or replace like with like.

The test that matters

Treasury's own examples set the line clearly. A duplex constructed through a knock-down rebuild replacing a single, free-standing house is an eligible new build. A free-standing house constructed through a knock-down rebuild replacing an older, smaller free-standing house is not.

Same client. Same block. Same demolition. The tax outcome flips on whether the client builds one dwelling or two.

The principle Treasury cites is that a new build must "genuinely add to supply." The rest of the eligibility examples follow the same logic. Any residential construction on previously vacant land qualifies. A newly constructed apartment bought off-the-plan qualifies. A newly built property first sold within 12 months of occupation qualifies. Extending an existing house to add bedrooms does not. A granny flat built alongside an established property that is not itself eligible does not.

For the client with the older house, the conversation has become one about scale. Building a single replacement dwelling means the new house will not qualify for negative gearing from 1 July 2027. Building two or more means it does.

What "held at announcement" actually protects

The first thing to establish with any property client is whether their existing holdings are grandfathered.

Properties held at the announcement time (7:30pm AEST on 12 May 2026) remain eligible for negative gearing under the existing rules for as long as they are held. This includes properties where a contract had been entered into but not yet settled at the announcement time. For clients whose portfolios pre-date May 2026, the negative gearing treatment of their existing properties is unchanged.

The window between the announcement time and 30 June 2027 is the tighter one. Properties purchased in that window can be negatively geared during the window itself, but not from 1 July 2027 onwards. Clients who bought an established investment property in late 2026 need to know that the negative gearing tap turns off on 1 July 2027.

Properties purchased from 1 July 2027 onwards: only new builds qualify. And "new build" means what Treasury says it means.

The four cases in the exposure draft

Treasury has released an exposure draft that gives the new build definitions legal effect. It sets out four cases where a residential dwelling qualifies as a new residential dwelling.

The basic case is a taxpayer who acquires vacant land and then constructs a dwelling on it.

The more-dwellings case is a taxpayer who acquires land with at least one existing dwelling and, after acquisition, increases the total number of dwellings on the land. Each new dwelling must be separately transferable.

The purchase-within-24-months case covers a taxpayer who acquires a dwelling from another entity within 24 months of the certificate of occupancy first being issued.

The conversion case covers a taxpayer who acquires land with a non-residential building on it and, after acquisition, converts it into a residential dwelling.

Each case has additional technical conditions around when a certificate of occupancy was first issued, which the exposure draft sets out.

The draft also includes an anti-avoidance provision. Where a scheme is entered into for a purpose of treating a residential dwelling as a new residential dwelling to obtain a tax benefit, the effects of that scheme are to be disregarded. How that provision applies in specific fact patterns is a question the exposure draft does not resolve.

What firms need to work through with clients now

Property investor clients will have three types of question in the year ahead.

Existing portfolio. Confirm which properties are grandfathered (held at 7:30pm AEST on 12 May 2026) and which were bought in the transitional window. Grandfathered properties retain their negative gearing treatment. Transitional-window properties lose negative gearing from 1 July 2027.

Purchases between now and 30 June 2027. Any established residential property bought in this window can be negatively geared until 30 June 2027 and then not. Clients considering a purchase need to know that.

Purchases from 1 July 2027 onwards. Only new builds qualify. For clients considering knock-down rebuilds, subdivisions, or off-the-plan purchases, the question is whether the transaction fits one of Treasury's four cases. For clients considering established properties, negative gearing is no longer part of the calculation.

The other half of the package

The same reforms package also changes capital gains tax from 1 July 2027. The 50 per cent CGT discount for individuals, trusts and partnerships is being replaced with cost base indexation and a 30 per cent minimum tax on capital gains. Cost base indexation will use CPI in a similar manner to the arrangements in place between 1985 and 1999.

The minimum tax rate of 30 per cent applies to real capital gains accruing from 1 July 2027. It does not affect taxpayers whose capital gains are already taxed at 30 per cent or more. Recipients of means-tested income support payments are exempt from the minimum tax if they receive any payment in the financial year they realise the capital gain.

The main residence CGT exemption continues. The four small business CGT concessions are unchanged. The 60 per cent CGT discount on qualifying affordable housing is fully retained. Investors who buy new builds can choose either the 50 per cent CGT discount or indexation and the minimum tax when they sell.

The client conversation to have this quarter

For every property investor client, the two conversations that need to happen well before 1 July 2027 are which of their existing properties are grandfathered, and what any planned purchases or rebuilds look like under the new rules. The clients most likely to be caught off guard are those in the middle of decisions that made sense under the old rules and now need to be re-examined under the new ones.

The client with the older house on the good block is a case in point. What they build next now decides what tax treatment applies for the life of that property.

The Treasury Budget 2026-27 Tax Explainer sets out the full detail.