What the negative gearing changes mean for housing construction and development in Victoria

What actually changed

Two reforms sit at the centre of the package.

Negative gearing. From 1 July 2027, residential properties acquired after 7:30pm AEST on 12 May 2026 can no longer have net rental losses offset against salary or other personal income. Those losses are quarantined and can only be applied against residential rental income or future capital gains from rental property.

‍Capital gains tax. The 50% CGT discount for individuals, trusts and partnerships is replaced by cost base indexation and a 30% minimum tax rate on capital gains, applying to gains accruing after 1 July 2027.

The exemptions are where it gets interesting for the construction sector:
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-New builds are exempt from both. Eligible new residential dwellings retain negative gearing and the 50% CGT discount.
-Existing holdings are grandfathered. Properties held at 7:30pm on 12 May 2026, including those under contract awaiting settlement, continue under the old rules until sold.
-Build-to-rent developments, widely held trusts, superannuation funds and private investors supporting government housing programs are also carved out.

The legislation defines a new build broadly: a residential property never lived in or previously sold. That covers newly constructed homes, off-the-plan apartments, house and land packages, and substantially renovated properties meeting the established definition. The ATO is expected to issue further guidance on edge cases, and subdivisions and conversions are among them. If your project sits near that line, this is worth watching closely.

The Victorian overlay

Victoria is not a neutral backdrop for a federal investor tax change. State settings have been moving in the same direction for two years.

Land tax thresholds were lowered and rates lifted from the 2024 land tax year under the COVID Debt Repayment Plan, with those settings legislated to run to 2033. Vacant Residential Land Tax now applies statewide, at 1% of capital improved value rising to 2% and 3% for consecutive years of liability. Add the short stay levy, congestion levy increases and the Emergency Services and Volunteers Fund.

The measure most relevant to development is the VRLT extension that took effect from 1 January 2026, capturing certain residential capable land in metropolitan Melbourne that has remained undeveloped for five years or more.

Read that alongside the federal reform and the direction is unambiguous. Holding land is being taxed. Building on it is not. Land banking has an annual cost that compounds, while new construction retains the investor tax treatment that established stock is losing.

Planning policy points the same way. The Townhouse and Low-Rise Code at clause 55 introduced deemed-to-comply standards and third-party review exemptions for developments up to three storeys. The Housing Choice and Transport Zone upzones land around designated activity centres. The Planning Amendment (Better Decisions Made Faster) Act 2026 received royal assent in February. All of it is aimed at the state's target of 2.24 million new homes by 2051.

What the data actually shows

• This is where honest reporting matters, because the early evidence is genuinely mixed and anyone telling you otherwise is selling something.
  
  ‍The negative signals. National building approvals fell 3.6% in July 2026. New home sales have declined for three consecutive months. Lending to investors in the established market has dropped by close to 20%. In Victoria specifically, investor lending peaked at $9.7 billion in December 2025 and had eased to $7.67 billion by March 2026. Melbourne auction clearance rates have been running in the high 50s, below the level associated with balanced conditions. Victorian dwelling completions are tracking toward their lowest level in a decade.
  
  ‍The counterweight. Building approvals remain 8.3% ahead year-on-year. Commonwealth Bank's assessment is that the impact on construction activity is ambiguous, and expects the combined effect of the policy package to be neutral to slightly positive for supply, on the basis that retaining negative gearing for new dwellings redirects investor demand from established stock toward new builds, particularly for apartments where pre-sales drive feasibility. CBA also expects dwelling prices around 3% lower than they otherwise would have been.
  
  ‍The industry critique. The Housing Industry Association points to the Budget papers' own modelling, which it reads as indicating the negative gearing and CGT changes will reduce new housing supply by roughly 35,000 homes over the next decade, and argues the tax measures work against the Budget's supply-side reforms. Others note that New Zealand's 2021 removal of interest deductibility for residential investors was reversed in 2024 after investor demand fell without a visible improvement in first-home buyer affordability, though Australia's reform is narrower.
  
  The reforms are also not operating alone. The RBA held at 4.35% in August 2026, construction costs remain elevated, and residential builders continue competing for trades against major infrastructure and data centre projects. Attributing every movement in the data to one tax change would be a mistake.

What it means for development in Victoria

Infill and townhouse development. This is the segment where the incentives align most cleanly. New dwellings retain the investor tax treatment, the townhouse code has streamlined approvals up to three storeys, and activity centre upzoning has expanded the eligible land. Established subdivision patterns across Melbourne's middle ring, with their large lots, suit consolidation and redevelopment.

‍Knock-down rebuild. A KDRB delivers a new dwelling, so it sits on the favourable side of the tax line. Expect continued interest from owner-occupiers and, increasingly, from investors who would previously have bought established.

‍Land holdings. The VRLT extension to long-undeveloped metropolitan land changes the calculus for anyone holding a site without a clear timeline. Doing nothing now carries a recurring, escalating cost.

‍Apartments and build-to-rent. Investor pre-sales underpin apartment feasibility, and the new-build exemption preserves that. Build-to-rent has its own carve-out.

‍Established stock. Lower investor competition and softer prices favour owner-occupiers and, for developers, may improve site acquisition economics.

‍The window before 1 July 2027. There is a defined transition period, and it is reasonable to expect it to shape timing decisions on both acquisitions and project commencements.

The practical point

Whatever view you take of the policy, the effect on project decisions is concrete. Whether a site qualifies as a new build, how a subdivision or conversion is treated, and whether a project can be delivered inside a given window are now questions with direct tax consequences.

Those questions rest on things that have to be established before anything else can proceed: where the boundaries actually sit, what the site can physically accommodate, and whether the yield assumed in a feasibility survives contact with the real levels, easements and constraints on the ground.

If you are assessing a site in the current environment, the survey work is the cheapest part of finding out whether the project works.

This article is general information about policy settings and market conditions. It is not tax, financial or legal advice. Speak to your accountant or adviser about how these changes apply to your circumstances.
‍Key sources: ATO — Tax reform, boosting home ownership; Treasury Laws Amendment (Tax Reform No. 1) Act 2026; Budget Paper No. 2, Budget 2026–27; ABS Building Approvals, July 2026; Commonwealth Bank, 2026 Budget housing outlook; Housing Industry Association; Victorian State Revenue Office; Victoria Planning Provisions clauses 54, 55 and 57.