Most of the national argument about Capital Gains Tax assumes property owners are sitting on gains. For a group of Melbourne buyers who bought in 2021, that assumption no longer holds. With values below where they were five years ago and the Reserve Bank lifting rates again on Tuesday, some investors weighing a sale are now looking at a capital loss, and the tax rules for losses work very differently from the rules for gains.

Melbourne is below its 2021 level

Cotality's October figures, published on 2 November, show Melbourne dwelling values are 7.3 per cent below their level five years ago. The ACT is virtually unchanged over the same period.

Sydney is not immune either. Cotality data show Sydney values are 1.5 per cent below October 2021 levels.

Melbourne's median dwelling value now sits at $773,027, against a national median of $884,855, according to the same data.

The broader downturn is fast. Combined capital city values have fallen 8.1 per cent over seven months, which Cotality describes as the fastest pace in 40 years of data. The 2022–23 downturn fell 7.0 per cent over the same period.

Rates and forecasts point to more pressure

The Reserve Bank's Monetary Policy Board raised the cash rate by 25 basis points to 4.85 per cent on 3 November. In its statement, the board said "housing prices have fallen significantly and the Unemployment rate has risen".

Forecasters expect further falls. Commonwealth Bank now expects Melbourne values to fall about 13 per cent peak to trough. That is a forecast, not a certainty, and CBA has already revised its outlook once since September.

Vic Prop's Jin Ling said he expects a "three-to-four-year period" before values recover strongly.

For an investor who bought near the 2021 level and is under pressure from higher repayments, that timeline matters. Selling now may mean crystallising a loss rather than a gain. Holding on, by contrast, means carrying higher repayments while waiting for a recovery that is not guaranteed.

How a capital loss works under current law

Under long-standing capital gains tax rules, a capital loss arises when the amount you receive for an asset is less than its reduced cost base.

For an Investment property, the cost base generally includes the purchase price plus incidental costs such as stamp duty, legal fees and agent's selling costs. For a rental property, capital works deductions you have claimed reduce the cost base.

The key limitation is that a capital loss can only be used against capital gains. It cannot be deducted against salary, wages or rental income.

If you have no capital gains in the year of sale, the net capital loss is carried forward. It can be used against capital gains in later years, with no time limit for individuals.

When you do have gains, losses are applied first, before the 50 per cent CGT discount that currently applies to Assets held for more than 12 months. That ordering can reduce the value of the discount on the gains being offset, so the timing of sales across different assets can affect the final tax outcome.

The main residence exemption cuts both ways for owner-occupiers. If a property was your home for the whole time you owned it, any capital gain is disregarded, and so is any capital loss.

That means a family selling its Melbourne home below the 2021 purchase price generally gets no tax benefit from the loss. The loss provisions mainly matter for investors and for properties that were rented out for part of the ownership period.

Hypothetical example: a 2021 investor sells

Hypothetical example: an investor bought a Melbourne apartment in late 2021 for $800,000. Say stamp duty and legal costs on purchase came to $45,000, and they claimed $12,000 in capital works deductions while renting it out.

Assume the property has tracked Melbourne's five-year change of minus 7.3 per cent, putting its value at $741,600. They sell at that price and pay $15,000 in agent's fees and other selling costs.

Their reduced cost base is $800,000 plus $45,000 plus $15,000, minus $12,000, which equals $848,000.

Their capital loss is $848,000 minus $741,600, or $106,400.

If they also sold shares that year for a $30,000 capital gain, the loss wipes out that gain entirely. The remaining $76,400 is carried forward to use against future capital gains. None of it can be used to reduce tax on their wages.

This example is illustrative only. Actual figures depend on the property, the costs and the owner's circumstances.

Where the 2027 changes fit

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 replaces the 50 per cent CGT discount with cost-base indexation and a 30 per cent minimum tax, for gains accruing from 1 July 2027.

The same law limits negative gearing to new builds for properties bought after 7:30pm AEST on 12 May 2026, from 1 July 2027. Existing holdings are grandfathered.

What is less clear is exactly how capital losses, including losses carried forward from before 2027, will interact with the new indexation and minimum tax regime. The changes are being legislated in tranches. The Tax Reform No. 3 Bill, now before Parliament, contains a second CGT Tranche covering more complex cases, including trusts, and further tranches are expected.

How those losses will be treated after 1 July 2027 is not yet settled, because the rules are still being finalised.

What to watch

  • 4 November: The RBA releases its Chart Pack, which may give more detail on the housing outlook.
  • 5–6 November: Senate Economics Legislation Committee hearings on the Tax Reform No. 3 Bill, with a report due on 13 November.
  • 25 November: The next monthly CPI release, a key input for whether rates rise again.
  • 1 July 2027: The new CGT and negative gearing settings begin.

For 2021 buyers, the question is shifting from how much tax a gain will attract to whether a loss can be used at all. Keeping complete records of purchase costs, improvements and deductions claimed will matter either way.