What the Budget Actually Changed
The 2026 federal budget made headlines for restricting negative gearing. But if you're considering a Knock Down Rebuild, the news is actually worth reading carefully, because KDR investors are in a better position than many people realise.
Here's what changed, and what it means for you.
From budget night on 12 May 2026, negative gearing on established residential investment properties has been restricted for new purchases. From 1 July 2027, rental losses on those properties can no longer be offset against other income, they'll be quarantined and carried forward.
But there's a critical carve-out: new builds are exempt. The government wants investor money flowing into new housing stock, not existing homes. A Knock Down Rebuild — where you demolish an existing house and construct a brand new home on the same block — qualifies as a new build under the right conditions.
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The KDR Advantage
If your KDR project results in a newly constructed dwelling (for example, a duplex or dual occupancy replacing a free-standing house), you retain access to negative gearing during construction and into the rental period. This means any losses — interest, depreciation, and holding costs — can still be offset against your other income.
On future sale, you also retain access to the 50% CGT discount, provided you hold the asset for at least 12 months and are an Australian resident for tax purposes. Under the new budget rules, new build investors can choose to apply either the 50% CGT discount or the new indexation method — giving you flexibility when you eventually sell.
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What to Watch
Not every KDR automatically qualifies as a "new build" for tax purposes. A free-standing house rebuilt to replace another free-standing house may not meet the definition — but a duplex or dual occupancy built through a KDR likely will. This is why the structure of your KDR project matters, and why getting the right advice early is essential.
The Bottom Line
While the budget tightened rules for established property investors, it deliberately protected — and in some ways rewarded — investors in new housing. If you already own a block of land and you're considering a Knock Down Rebuild, 2026 is still a sound time to explore your options.
Please note: This article is for general information only and does not constitute financial or tax advice. Speak to a qualified accountant or financial adviser about your specific circumstances before making investment decisions.
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