How You Can Lose Negative Gearing Grandfathering

Grandfathering is the most reassuring word in the 2026 tax reforms. It is also the most misunderstood. Investors are being told that a property held before Budget night is protected "for as long as you own it", and on a plain reading of the law that is only half true. The protection attaches to your ownership interest, and ownership interests change hands more often than people think: restructures, separations, deaths, title changes between spouses.

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received Royal Assent on 26 June 2026. Its negative gearing rules commence in the 2027-28 income year. That leaves a window in which many investors will restructure to manage the separate CGT changes, and some of those restructures will quietly destroy grandfathering they assumed was permanent. Treasury has since acknowledged part of the problem: the Tranche 2 consultation opened on 3 August 2026 with draft provisions that would keep the concession alive on death and on relationship breakdown. Nothing has been fixed for transfers to trusts and companies, and the draft itself is not law. This article explains how the exemption works, which transactions break it, what the draft would change, and why the usual CGT rollovers do not save you.

Does Grandfathering Apply to Negative Gearing?

The new rule sits in section 26-155 of the Income Tax Assessment Act 1997. Where deductions relating to residential dwellings exceed the assessable income from them in a year, the excess is denied, quarantined, and carried forward. Quarantined amounts can only be used against future net residential rental income or gains on residential dwellings, and the Budget factsheet confirms they cannot shelter salary or business income.

The exemptions are set out in the Parliamentary Bills Digest: interests acquired before Budget night, eligible new residential dwellings, dwellings covered by ministerial determination (such as affordable housing), and property held by complying superannuation funds or widely held unit trusts. For most individual investors, the pre-Budget exemption is the one doing the work, which is why understanding its precise wording matters so much.

What Does "Last Acquired" Mean for Your Property?

This is the detail almost every summary skips. The word "acquired" would have been generous: hold the property from before Budget night and you are protected. The legislation instead says "last acquired". Every time an ownership interest changes hands, the recipient acquires it afresh, and the clock resets to that date. A property the family has held since 2005 can lose its protection through a single transfer document, because the person now holding it acquired their interest after the cut-off.

The ATO's new legislation guidance confirms the measures and the commencement date, but it was last updated on 29 June 2026 and says nothing about partial interests or transfers. Until it does, our view is that investors should treat any change of ownership interest as a potential grandfathering event and get advice before signing, not after. This is exactly the kind of question we model in our property tax advisory work: the decision that cannot be undone deserves the analysis before it is made.

Which Transactions Break Negative Gearing Grandfathering?

There are now two positions to hold in mind: the law as it stands today, and the law as the Tranche 2 draft would leave it. The table below sets out both.

Three points follow from that table. The commercial restructures are untouched: a transfer to a trust or a company breaks grandfathering today and would still break it under the draft, and Treasury has said only that a restructure rollover is among the matters still to be consulted on. The relief that has been drafted is narrow, turning on a spouse, an existing co-ownership, or a formal family law instrument. And none of it is law, so a transfer signed this month is governed by section 26-155 as enacted, whatever the draft eventually says.

Do the CGT Rollovers Preserve Grandfathering?

The confusion is understandable. When a property transfers between spouses under a court order or binding financial agreement, the automatic marriage breakdown rollover in Subdivision 126-A disregards the capital gain and hands the cost base to the receiving spouse. It feels as though nothing has changed. But the rollover lives entirely inside the CGT provisions. Section 26-155 sits in Division 26, among the deduction rules, and its test is the acquisition date of the person now claiming the deduction. The receiving spouse acquired their interest at the transfer date. If that is after 12 May 2026, the interest is not grandfathered, even though the CGT position rolled over perfectly.

Death works the same way, and here a common error in circulation needs correcting. Several published explainers claim that inherited property keeps the deceased's acquisition date. It does not. Section 128-15(2) of the ITAA 1997 deems the beneficiary or legal personal representative to have acquired the asset on the day the person died. What carries across is the cost base under the separate cost base rules, which is a different thing entirely. On the Act as enacted, a death after 12 May 2026 gives the recipient a post-Budget acquisition date, and the grandfathering goes with it.

Treasury has drafted a fix, and it works by going around the rollovers rather than through them. The Tranche 2 exposure draft inserts proposed sections 26-156, 26-157 and 26-158. Each says that where the transferor acquired the interest before the Budget night cut-off, the recipient is taken to have acquired it at that earlier time, and the death timing rule in section 128-15(2) is disregarded. Section 26-156 covers a surviving spouse taking as joint tenant or beneficiary, section 26-157 a surviving co-owner who is not a spouse, and section 26-158 a transfer under an order, agreement or award of the kind listed in paragraphs 126-5(1)(a) to (f). The gaps matter as much as the coverage. A child who inherits a property their parent owned alone sits outside all three, as does a separating couple who transfer title informally rather than under a family law instrument. Estate plans and settlement drafting built around loss-making rental properties should be reviewed on that basis, alongside broader tax planning for the family group.

A Worked Example: One Family, Two Tax Personalities

In our experience working with Melbourne property investors, the risk rarely arrives as a tax question. It arrives as an asset protection question, an estate question, or a separation. Consider an investor with two established residential units, both negatively geared:

• Unit 1, acquired in 2014. Net rental loss of $8,000 in 2027-28. Grandfathered.
• Unit 2, acquired in August 2026. Net rental loss of $12,000 in 2027-28. Not grandfathered.

In 2027-28, the $8,000 loss on Unit 1 deducts against salary as it always has. The $12,000 loss on Unit 2 is caught by section 26-155. It can only offset net income from other residential property, and Unit 1 made a loss, so there is nothing to offset. The full $12,000 is quarantined and carried forward. It cannot be added to the property's cost base either: the Act inserts specific provisions, sections 110-38(8A) and 110-55(9JA), to prevent exactly that. The quarantined amount waits for future residential rental profits or a residential capital gain.

Geared investors should also remember a separate, current-year cost that has nothing to do with the 2027 changes: total net investment losses are added back when working out income for Medicare levy surcharge purposes. A negatively geared portfolio can push an investor over the surcharge threshold even where taxable income sits below it. We explain the thresholds, rates and family rules in our guide to the Medicare levy surcharge.

Now suppose that in 2029, on asset protection advice, the investor transfers Unit 1 into a family trust. The trust acquires the interest in 2029, well after Budget night. From that point, Unit 1's losses inside the trust are quarantined too. A routine restructure has converted the portfolio from half-protected to fully caught, and no part of the Tranche 2 draft would help, because it deals with death and relationship breakdown rather than restructures. The stamp duty and CGT costs of the transfer would have been modelled as a matter of course; the grandfathering cost is the one that gets missed.

Should You Restructure Before 1 July 2027?

The same Act rebuilds the CGT system: the second reading speech confirms the 50% discount is replaced with cost base indexation and a 30% minimum rate on gains accruing from 1 July 2027, with a deemed disposal and market value reset at 30 June 2027. We covered the small business side of these changes, including the active asset reduction turnover threshold rising from $2 million to $10 million, in our post on the 2026 CGT reform carve-outs.

That combination pushes investors toward restructuring in the window before commencement, and the two measures pull in opposite directions: the transactions that reposition assets for the CGT changes are the very transactions that break negative gearing grandfathering. There is a further constraint. Part IVA, the general anti-avoidance rule, can apply to schemes entered into for the dominant purpose of obtaining a tax benefit. A restructure needs genuine commercial drivers, documented at the time, and it needs numbers run across stamp duty, CGT, land tax, and now section 26-155. The Government's tax reform page flags further consultation to come, including on a restructure rollover, so acting early on incomplete rules carries its own risk. Investors holding property through super should also note the separate changes to SMSF borrowing, which our SMSF accountants can walk through, and individual owners should factor the changes into personal tax planning for 2027-28. For portfolio-level decisions, 3-way forecasting shows the cash flow effect of quarantined losses before they arrive. Our guide to common ATO property tax traps covers the compliance side.

Key Takeaways

Frequently Asked Questions