Negative Gearing Reforms: What Happens When a Property Changes Hands on Death, Separation or When Your Home Becomes a Rental
September 25, 2026
Since Budget night on 12 May 2026, most property investors have heard the headline on negative gearing: from 1 July 2027, rental losses on established residential properties bought after the Budget can no longer be used to reduce your salary or business income. Properties you already owned (or had under contract) at Budget time are grandfathered, and genuine new builds are exempt.
What got far less attention is a follow-up law passed in August that fills some important gaps. Without it, a property could have lost its protected status simply because the owner died, a couple separated, or someone moved out of their home and started renting it. This article explains what changed and who it helps.
Quick recap: the core negative gearing changes
- Cut-off: 7:30pm AEST, 12 May 2026 (Budget time).
- Start date: the 2027–28 income year (from 1 July 2027).
- Who’s affected: established residential dwellings acquired after Budget time.
- What happens to losses: net rental losses are quarantined. They can only be offset against residential rental income and gains, with any excess carried forward to future years.
- Who’s protected: properties held at Budget time (grandfathered) and qualifying new residential dwellings. New builds also keep access to the 50% CGT discount.
Both exemptions depend on when you acquired the property and what kind of property it was when you acquired it. That’s where the problem arose. Under the tax law, a property is treated as re-acquired in a number of everyday situations, which could have reset the clock and pushed a grandfathered property into the quarantine rules.
The fix: Treasury Laws Amendment (Tax Reform No. 2) Act 2026
The Treasury Laws Amendment (Tax Reform No. 2) Act 2026 (Act No. 71 of 2026):
- received Royal Assent on 26 August 2026;
- has four schedules that commence on 1 October 2026; and
- contains the negative gearing amendments in Schedule 4, which apply from the 2027–28 income year onwards.
That last point matters. Although the law is technically in force from October 2026, the Schedule 4 rules operate from the same income year the quarantine rules start. There is no gap where affected owners are caught out.
Five situations where your negative gearing status is protected
1. Your home becomes a rental
When a main residence is first rented out, the tax law can treat you as having re-acquired it at market value on that date (section 118-192). Under the original rules, that deemed “purchase” could have made a home bought years ago look like a post-Budget acquisition, or cause a new build to lose its new-dwelling status.
Schedule 4 tells you to disregard that deemed acquisition for negative gearing purposes. The property keeps the status it had based on when you actually bought it.
Example: Sarah bought a townhouse in Coomera in 2019 and lived in it. In 2028 she relocates for work and rents it out. Even though the tax law treats her as re-acquiring it at market value in 2028, it remains grandfathered and her rental losses can still offset her salary.
2. A surviving spouse inherits the property
Where a property passes to a surviving spouse on death, the spouse can step into the deceased spouse’s position (new section 26-156). If the deceased acquired it before Budget time, or it was a new residential dwelling in their hands, the surviving spouse inherits that treatment.
Example: Michael bought an investment unit in Southport in 2016 in his sole name. He passes away in 2029 and leaves it to his wife, Anne. Anne is treated as having acquired it when Michael did, so it stays outside the quarantine rules.
3. A co-owner dies
Where co-owners hold a property and one dies, the surviving co-owner who acquires the deceased’s interest gets corresponding continuity (new section 26-157), provided both owners held the property on a qualifying basis. This covers co-owners who aren’t spouses, such as siblings or business partners holding a rental together.
4. Relationship breakdown
Where a property is transferred between spouses or former spouses under a court order, binding financial agreement or arbitral award of the kind covered by the marriage and relationship breakdown CGT rollover (section 126-5), the receiving spouse preserves the transferring spouse’s treatment (new section 26-158).
Example: Tom and Lisa separate. Under a Family Court order, Tom’s 2021 investment house in Ormeau is transferred to Lisa. Lisa keeps the pre-Budget status Tom had, so she can continue to negatively gear it.
Note this protection is limited to spouse and former-spouse transfers under those formal arrangements. An informal handover or a sale between ex-partners won’t qualify.
5. Inherited new-build status carries through to CGT
New residential dwellings get a CGT concession when sold (section 115-102). New section 26-159 makes sure that where new-dwelling status passes under the spouse, co-owner or relationship breakdown rules above, it also counts for that CGT concession. You keep both the negative gearing and the CGT benefit.
What the negative gearing fix doesn't cover
- Other beneficiaries. The death rollovers are specific to surviving spouses and co-owners. If a property passes to someone else, such as an adult child, check the position carefully before assuming the grandfathered status carries across.
- Ordinary purchases and sales. Buying an established property after Budget time, including from a family member outside a relationship breakdown, is still caught by the quarantine rules.
- Loss calculations. Schedule 4 preserves status. It doesn’t change how quarantined losses are calculated, ordered or carried forward.
What should property owners do now?
- Document acquisition dates. Keep contracts, settlement statements and any build or occupancy records that prove when you acquired each property and whether it qualified as new.
- Review estate plans. How a property is held (sole name, joint tenants, tenants in common) and who it’s left to now affects its negative gearing status.
- Get advice before a family law settlement. Transfers need to fall within the formal rollover arrangements to preserve status.
- Moving out of your home? Keep records of when you first rented it and its market value at that time. Other tax rules still rely on them even if the negative gearing status is preserved.
Talk to Brick Road Accounting
These rules are new and they interact with CGT, estate planning and family law. If you own an investment property, are managing a deceased estate, or are working through a property settlement, we can review your position before the 2027–28 year begins.
Book a consultation with our team, with extended hours available across Brisbane and the Gold Coast.
General information only. This article is based on the Treasury Laws Amendment (Tax Reform No. 2) Act 2026 as assented to on 26 August 2026 and does not take into account your personal circumstances. The examples are illustrative. Please seek professional advice before acting on any of the information above.
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