Negative gearing grandfathering attaches to your ownership interest, not to the property. From the 2027-28 income year, losses on residential property interests acquired after 7.30pm AEST on 12 May 2026 are quarantined. Transfers to a trust, adding a spouse to title, relationship breakdown transfers and inheritance all create a fresh acquisition, and the CGT rollovers do not preserve the concession.
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. This article explains how the exemption actually works, which transactions break it, and why the usual CGT rollovers will not save you.
Yes. Residential property interests last acquired before 7.30pm AEST on 12 May 2026 are exempt from the new negative gearing restrictions, which apply from the 2027-28 income year. Losses on those grandfathered interests remain deductible against salary and other income under the existing rules.
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.
The exemption applies to an ownership interest in a residential dwelling that the taxpayer last acquired before 7.30pm AEST on 12 May 2026. It is a test about the person and their interest, not the property. If the interest is re-acquired after that time, the grandfathering does not follow it.
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 detailed guidance on partial interests and transfers is still to come. 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.
Any transaction that creates a fresh acquisition of the ownership interest after 7.30pm AEST on 12 May 2026 removes grandfathering on that interest. That includes transfers to trusts or companies, adding a spouse to title, changing ownership proportions, relationship breakdown transfers and inheritance. Holding, refinancing and renovating do not.
On a plain reading of section 26-155, the position looks like this:
| Transaction | Fresh acquisition? | Grandfathering outcome |
|---|---|---|
| Continue to hold as-is | No | Retained |
| Refinance the loan | No | Retained |
| Renovate the property | No | Retained |
| Transfer to a family trust | Yes | Lost on the interest transferred |
| Transfer to a company | Yes | Lost |
| Add a spouse to title | Yes | Lost on the interest the spouse acquires |
| Change ownership proportions | Yes | Lost on the increased portion only |
| Relationship breakdown transfer | Yes | Lost on the transferred interest, despite the CGT rollover |
| Inheritance from a deceased estate | Yes | Lost, as the beneficiary acquires at the date of death |
Two cautions. First, this is our reading of new law. The provision has not yet operated for a single income year, no ATO ruling addresses these transfer scenarios, and the harsher outcomes look unintended rather than designed. Guidance or amendment before 1 July 2027 is a real possibility. Second, the outcomes for death and separation deserve their own explanation, because most commentary gets them wrong.
No. The marriage breakdown rollover and the deceased estate rules operate only within the capital gains tax provisions. They preserve cost base and defer gains, but the negative gearing test in section 26-155 is a deduction rule that asks when the taxpayer last acquired the interest. Nothing in the rollovers reaches that question.
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 is sharper still, 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. For any death after 12 May 2026, the beneficiary's acquisition date is the date of death, which is after the cut-off. The beneficiary inherits the property and its cost base, but on the current wording, not the negative gearing grandfathering. Estate plans built around loss-making rental properties should be reviewed with this in mind, alongside broader tax planning for the family group.
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:
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.
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 the change is permanent for as long as the trust holds the property. 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.
We model every transfer across both the CGT reforms and the negative gearing rules before you sign anything, so a fix for one problem does not create a bigger one.
Contact UsNot without modelling both regimes together. The CGT reforms commencing 1 July 2027 create pressure to restructure holdings, but restructures involving residential property can permanently break negative gearing grandfathering on the interests transferred. Anti-avoidance rules also apply to arrangements driven mainly by tax outcomes.
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.
| Takeaway | What to do this week |
|---|---|
| Grandfathering follows the interest, not the property | List every residential interest and its acquisition date against 12 May 2026 |
| Transfers, trusts and title changes can break it | Pause any planned transfer of a grandfathered property until it is modelled |
| CGT rollovers do not preserve it | Review estate plans and any separation settlements involving rental property |
| Quarantined losses cannot go to cost base | Forecast 2027-28 cash flow assuming caught losses give no refund |
| The rules are new and guidance is pending | Get advice on your facts before acting; do not rely on general summaries |
Book a meeting and we will map each ownership interest against the new rules, so you know exactly what a transfer would cost before it happens.
Book a MeetingDisclaimer: The information provided in this article is general in nature and does not constitute specific tax, legal, or financial advice. The negative gearing and CGT measures discussed commence from the 2027-28 income year, several implementation details remain subject to ministerial determination and ATO guidance, and our reading of the transfer scenarios may be affected by future guidance or amendment. Property transfers also involve legal and stamp duty considerations requiring advice from a solicitor. We recommend seeking professional advice tailored to your individual circumstances. 42 Advisory is a CPA firm and Registered Tax Agent.
Yes. Interests in residential dwellings last acquired before 7.30pm AEST on 12 May 2026 are exempt from the new loss quarantine rules that apply from the 2027-28 income year. Losses on those interests remain deductible against other income under the existing negative gearing treatment.
7.30pm AEST on 12 May 2026, which was Budget night. The test is when the taxpayer last acquired their ownership interest in the residential dwelling. Interests acquired at or after that time are subject to the new rules from 1 July 2027.
Interests acquired before Budget night, eligible new residential dwellings, dwellings covered by ministerial determination such as affordable housing, complying superannuation funds, and widely held unit trusts. Losses relating to fringe benefits are also excluded from the quarantine.
From the 2027-28 income year, which starts on 1 July 2027. The legislation received Royal Assent on 26 June 2026, so the rules are law now, but the first year in which losses can be quarantined is 2027-28.
In the 2026 reforms it usually refers to gains accrued before 1 July 2027, which keep access to the 50% discount through a deemed market value disposal at 30 June 2027. That CGT transitional treatment is separate from negative gearing grandfathering, which turns on when an ownership interest was last acquired.
On the current wording, no. A beneficiary is deemed to acquire the asset on the date of death under section 128-15(2), so a death after 12 May 2026 gives the beneficiary a post-Budget acquisition date. The cost base carries across; the grandfathering does not. ATO guidance may address this, so take advice on your facts.