By Colin Lewis, Head of Strategic Advice, Fitzpatricks Advice Partners
May 2026

Sheldon and Amy sold their apartment after splitting up.  After dividing the proceeds, each didn’t have enough to go out and buy another property, so they’re both looking to rentvest.

This was before budget night.

The budget has rewritten the rules for residential property investors and for two groups, the implications are poles apart.

For investors like Sheldon and Amy looking to rentvest, the strategy has been dismantled whereas investing in property via a self-managed super fund (SMSF) got a free kick.

From 1 July 2027, negative gearing on residential property will be limited to new builds, and the 50 per cent capital gains tax (CGT) discount will be replaced by inflation indexation and a 30 per cent minimum tax rate.

Properties owned before budget night are grandfathered for negative gearing, which should include principal residences turned into investment properties.

Rentvesting: the assumptions no longer hold

Rentvesting; rent where you want to live, usually close to the city, beyond your purchasing power – or live with your parents (now happening more often) – and buy somewhere more affordable where the numbers work, usually further out or interstate.

It works on two levers.

Negative gearing covers the cash shortfall between rental and holding costs by reducing the tax on your salary. Capital growth, taxed at half the marginal rate after twelve months, does the wealth-building.

Both levers have just been weakened for anyone buying an established property from budget night onwards – assuming the budget measures become law.

From 1 July 2027, rental losses on an established investment property bought after 12 May 2026, can no longer be offset against other income which includes wages. Losses are ring-fenced to residential property income and carried forward until the property turns a profit or is sold.

For Amy who’s on the top marginal tax rate, a $20,000 annual shortfall, means $9,400 of tax relief no longer arriving each year – the shortfall needing to be funded entirely from her after-tax income.

The CGT reforms compound the problem.

Indexation rewards investors whose gains barely outpace inflation and punishes those whose gains substantially exceed it – which is the entire point of buying property in growth areas.

The faster an asset grows relative to inflation, the more punitive indexation becomes.

The 30 per cent floor catches lower-bracket investors; top earners already exceed it.

Rentvesting still works but the maths is different. The property must be viable on cash flow from day one, because the tax system will no longer subsidise a loss-making asset against other income.

New builds remain fully negatively geared and retain the choice between using the 50 per cent discount or new inflation indexation method on sale. So, if Sheldon or Amy are prepared to buy off-the-plan or house-and-land, the original maths still works.

Knock-down rebuilds and renovations that don’t add to supply don’t qualify.

For everyone else, the question changes from “how much loss can I wear?” to “where can I find a yield that covers the mortgage?” – two very different shopping lists.

If Sheldon or Amy move quickly and buy an established residential property, they can negative gear up until 30 June 2027 – getting cash-flow relief until then.

SMSF property: an unexpected winner

Tucked inside the budget papers is a single sentence that changes the relative attractiveness of every long-term property investment: superannuation funds, including SMSFs, are excluded from both the negative gearing restriction and the CGT changes.

That exclusion preserves an already-favourable set of rules.

In super, rental income is taxed at 15 per cent in accumulation phase and zero in retirement phase.

The one-third CGT discount on assets held more than twelve months survives – giving an effective CGT rate of 10 per cent in accumulation and zero in retirement.

Division 296 adds an extra 15 per cent personal tax on earnings on balances above $3 million and a further 10 per cent tax on earnings on balances over $10 million.

Outside super, the minimum CGT rate from 1 July 2027, will be 30 per cent. On a 10-year hold of a growth asset, that is the single largest tax wedge between super and personal investing under tax law: an investor selling in their own name faces at least 30 per cent tax on real gains, while the same asset held in an SMSF and sold in retirement phase attracts generally no tax at all.

The negative gearing rules don’t bite inside super either – an SMSF’s rental losses have always been quarantined within the fund. The new restriction simply codifies for individuals what super has always done.

For SMSFs gearing into property under a limited recourse borrowing arrangement (LRBA), the settings are intact – it’s surprising the government didn’t curtail LRBAs along with all the other changes.

Investing in residential property via an SMSF is not right for everyone.

Fund members and their family can never live in it – even on a short-term basis like for a holiday.

As Sheldon and Amy both wish to live in their own property one day, super is not the structure to buy in.

LRBAs remain a specialist strategy with strict compliance obligations, concentration risk in a single illiquid asset, and contribution caps that constrain how quickly a fund can service debt.

The threshold for SMSF property investment to make sense hasn’t moved. It remains an option for people with sufficient super, a genuine long-term horizon, and the capacity to manage the structure.

Given the government’s negative gearing and CGT reforms for personal ownership while preserving the settings in super, it’s highly likely there will be a shift away from holding established residential properties in individual names towards investment via SMSF under an LRBA.

Just be wary of the property spruikers who will come out of the woodwork on the back of this budget.