Wealthy property investors should be excluded from making hefty tax deductions if negative gearing laws are overhauled, according to research out today.

Key points: A report by AHURI says negative gearing overhaul will reduce impact on lower income investors

A report by AHURI says negative gearing overhaul will reduce impact on lower income investors Investors in the top 25 per cent will receive zero rental deductions under proposal

Investors in the top 25 per cent will receive zero rental deductions under proposal Professor Rachel Ong ViforJ says reducing CGT discounts means high income investors will pay more tax

In a proposal certain to be rejected by the Federal Government, a report by the Australian Housing & Urban Research Institute (AHURI) says $1.7 billion could be saved each year by radical changes to the negative gearing regime.

Under the modelling, lower income investors in the bottom 50 per cent of incomes would continue to receive a 100 per cent rental deduction while "sophisticated investors" in the top 25 per cent would receive zero rental deductions.

Middle income investors in the 51st to 75th percentile of incomes would have their rental deductions under negative gearing lowered to 50 per cent if the changes are adopted.

While the proposal would eliminate negative gearing deductions for wealthy investors, it would reduce the impact on lower income investors in "a reform pathway that is more politically acceptable".

Professor Alan Duncan from the Bankwest Curtin Economics Centre at Curtin University said the research rejected the Government's concerns that an overhaul to negative gearing laws would have unintended consequences.

"Our modelling suggests that a progressive rental deduction for investors cushions less wealthy 'mum and dad' investors from significant drops in tax savings, and may be an appropriate policy option," Professor Duncan said.

"Current negative gearing policies are heavily skewed towards high income earners, raising concerns about the extent to which these policies exacerbate income and wealth inequality in Australia."

The report profiles the typical investor using negative gearing as a middle-aged male in full-time work on an average taxable income of $80,000 after deducting rental expenses.

The study estimated the reforms would save more than $1.7 billion from the $3 billion annual cost of negative gearing deductions each year.

The report highlights several transitional arrangements that would ease the pressure arising from the proposed reforms to ensure the changes are gradual.

Percentage and number of property investors who are negative geared, 1993-94 to 2013-14. ( Supplied: AHURI )

Capital gains tax discounts are also "heavily weighted" toward the more affluent according to the report, where the average sophisticated investor has a portfolio of $730,000 and an assessable tax income of $82,000 compared to $31,000 for renters who do not own properties.

Co-author Professor Rachel Ong ViforJ from Curtin University said reducing CGT discounts meant high income investors would pay more tax and it would be a lower proportion of their take home income.

"The reform would be progressive in nature, reducing negative gearing tax savings by greater margins as tax assessable income increases," Professor Ong ViforJ said.

"Any CGT policy reform will need to be carefully communicated to avoid a misconception that the changes will have a proportionate impact on rental investors' net incomes."

The Federal Government has consistently dismissed proposals to overhaul the negative gearing saying Labor's proposals would be a "sledgehammer" to the property market.

Earlier this year, the ABC revealed that Treasurer Scott Morrison was advised by Treasury that the Labor policy would have a "small" impact on prices.

However, negative gearing tax breaks have been criticised as being partly responsible for surging capital city property prices in Sydney, Melbourne and Brisbane.

The research was commissioned by AHURI and carried out by researchers from Griffith University and Curtin University.