What the new policies for capital gains tax mean for first-home buyers

Owning a house has become an unrealistic goal for many young Australians, with a study by Macquarie University finding one-third no longer believe hard work and savings are enough.

Now changes to capital gains tax (CGT) in the 2026 federal budget have tipped the scales from investors towards first-home buyers.

From July 1 next year, the CGT 50 per cent discount will be replaced by cost-based indexation, adjusting capital gains for inflation, returning to the pre-1999 system. The government is also introducing a minimum of 30 per cent tax on capital gains.

Prime Minister Anthony Albanese told the ABC he wants to remove tax advantages from investors to give younger first-home buyers a chance and improve intergenerational equity.

The new CGT will mean most investors pay more tax on the profits from selling their properties.

Isaac Gross, a senior lecturer in economics at Monash University, said the policies will make it easier for first-home buyers by cooling investor behaviour.

“Investors are going to get less of a tax preference, so they're going to be more reticent to invest in housing, which might open up opportunities for people who want to buy the home,” Dr Gross said.

Dr Gross said house prices are likely to fall only by 1 or 2 per cent, but the biggest shift will be who buys them. 

“We'll see fewer investors and more homeowners,” Dr Gross said.

Investors who buy new housing will be exempt from the changes, which Dr Gross said may limit the disincentive to build and reduce the impact on rent prices.

Todd Want, head of tax at William Buck, told The Courier Mail that the new CGT policies may lead to investors holding onto their property to avoid paying higher taxes, which will limit opportunities for home buyers.

However, Dr Gross said investors holding properties longer can be beneficial for renters.

Dr Gross said renters will “get more long-term security”.

The government has introduced a partial grandfathering approach, which means that when an existing asset is sold after July 1, 2027, the capital gain will be split. 

The gain it accrued before then will be eligible for the 50 per cent discount, and the gain it accrued after will be subject to indexation.

Matthew Bowes, a senior associate at the Grattan Institute, told RN Breakfast that the grandfathering provisions of the policies may protect existing investors and would defeat the purpose of improving intergenerational equity in the housing market.

Dr Gross said the hybrid policy is sensible, with investors being taxed under both the new and old regimes, creating a balanced average.

“The tax that will be paid will be a weighted average … it doesn't give you complete immunity … I think that's a fair and reasonable way of doing that,” he said.

The CGT changes apply to most investment forms, not just residential property, to ensure no particular asset gets a tax advantage over another.

Dr Gross had previously warned that limiting the changes to housing could drive investors to other forms of investment, ultimately harming renters.

“We should tax for all types, so that we don't completely collapse the market for one type of investment," he said.

“If we want renters, we need investors to rent to them."

Dr Gross favoured the chosen CGT model of the return to inflation-adjusted taxation over the current flat discount.

“We don't want to tax people just for keeping up with inflation; we want to tax when they actually make money,” he said.

According to the Commonwealth Bank, the original CGT model was scrapped in 1999 because it was considered too complicated to adjust the tax to the inflation rate every year, and thus the 50 per cent discount was born.

However, with current technology, Dr Gross said it was logical to return to the original CGT policy, which taxes investors more fairly.

“Measuring inflation … is not a hard calculation to make, so there's no reason not to do it that way, as opposed to just giving people an arbitrary 50 per cent discount,” he said.

Paola Vasilatou, a final-year undergraduate student at Monash University, said the changes to CGT make her more optimistic about entering the housing market after graduation.

“It’s a step in the right direction,” Vasilatou said.

“I feel like I can achieve my goals and I’m more positive about going into the market."

The CGT changes come against a backdrop of a widening generational divide in housing wealth.

According to a study published in Housing, Theory and Society in 2023, the Australian intergenerational housing wealth gap widened from 161 per cent in 1997-98 to 234 per cent in 2017-18, advantaging the older generation.

This was driven by lower rates of homeownership and lower property value growth among the younger generation.

It is a gap the government is hoping its new CGT reforms will begin to close.