Australia’s capital gains tax discount and negative gearing rules have fuelled property investments and house prices rises, an e61 Institute report has found. Photograph: Mark Metcalfe/Getty ImagesView image in fullscreenAustralia’s capital gains tax discount and negative gearing rules have fuelled property investments and house prices rises, an e61 Institute report has found. Photograph: Mark Metcalfe/Getty ImagesLandlords ‘leveraging up’ by exploiting property tax rules are fuelling Australia’s housing affordability crisis, analysis findsExclusive: Capital gains tax discount and negative gearing rules created ‘extra artificial incentive’ for property speculation, the e61 Institute has found
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The combination of the capital gains tax discount and negative gearing rules has turbocharged debt-fuelled property speculation over recent decades, according to a new analysis of hundreds of thousands of property investments.
The federal budget in three weeks’ time is widely expected to include changes to tax breaks for investors, in an effort to rebalance the tax system away from the wealthiest Australians and to take pressure off home prices.
Read moreNick Garvin, an economist at the e61 Institute, said he and his co-author, Matt Nolan, found that the current tax settings have created an “extra artificial incentive” for landlords to borrow as much as possible against their investment properties.
This had contributed to higher house prices than otherwise would have been the case and played a part in the affordability crisis, he said.
Of the 900,000 investments in e61’s sample bought after 2007 and sold by mid-2025, 46,000 were economically unprofitable, but made money due to the capital gains tax discount.
The analysis showed how the tax rules reduced the probability of a property investment being economically unprofitable from 40% to 35% – a reduction of 5.1 percentage points, or 13%.
Garvin said the research showed how the current tax rules were “creating a difference between how the gains of the investment are taxed and how the losses on interest costs are taxed”.
More highly leveraged investments increase the risk and potential return on any investment.
But Garvin said the essential issue with property was that landlords were able to write off all of their interest expenses against their incomes, while only paying tax on 50% of capital gains for properties held for longer than a year.
The differential tax treatment meant net rental losses were more likely to be outweighed by the eventual sales profits.
The analysis of the hundreds of thousands of transactions showed that the typical tax on returns was 31% for investment properties with no debt.
This dropped progressively to 18.5% for properties with the highest loan-to-value ratio of 90%, despite receiving substantially higher pre-tax profits.
In other words, the higher your leverage, the higher your profits, and the lower your tax rate.
“This wedge between the tax on asset-side gains, and the tax deduction on liability-side losses” had distorted investor behaviour and boosted leverage, the report found.
An equal tax treatment would only allow half of interest expenses to be deducted against the income, Garvin said.
“And it’s specifically that difference that can be exploited by investors by leveraging up.”
Garvin said the additional incentive to borrow more had boosted investor demand for housing over the years.
“This has almost certainly put upward pressure on housing prices, although gauging how much is difficult,” Garvin said.
The e61 Institute has backed an inflation-linked discount on capital gains, but Garvin said equal treatment of debt expenses and capital gains would remove this bias towards borrowing larger amounts to invest in property.
Read moreA Greens-led parliamentary inquiry earlier this month found that the 50% discount “skewed the ownership of housing away from owner-occupiers and towards investors”.
Treasury is modelling changes that could see the discount reduced to 33% for housing investors, while retaining the current rate for shares and other investments.
There is also speculation that there could be limits imposed on the number of properties a single investor can negatively gear.
“A lot of the debate around changing the CGT discount rate has been focused on the effect on housing prices, but this channel we are pointing out in our note is potentially the most important one,” Garvin said.
“What we are showing here is that it’s more the design of the discount itself, rather than the rate, that is driving it.”
