Grandfathered negative gearing will no longer be lost when a spouse or co-owner dies, or when a property changes hands as a couple separates. The Treasury Laws Amendment (Tax Reform No. 2) Act 2026 received Royal Assent on 26 August, closing a gap critics had labelled the "widow's tax". For families holding established investment properties bought before Budget night, the fix removes a risk that would otherwise have landed from July 2027.

What the new law says

The Tax Reform No. 2 Act passed both Houses on 19 August 2026. Schedule 4 inserts four new sections into the Income Tax Assessment Act 1997.

Section 26-156 covers a surviving spouse who acquires the deceased spouse's ownership interest, either as surviving joint tenant or as a beneficiary of the estate.

Section 26-157 covers co-owners who are not spouses, such as siblings or friends who bought together, whether as joint tenants or tenants in common. If one dies and the survivor acquires the deceased's interest, through survivorship or through the estate, the rule applies.

Section 26-158 covers relationship breakdown, where a person acquires an interest from a spouse or former spouse under an order, agreement or award.

In each case, the person is treated as having acquired the interest before the 2026 Budget time, preserving negative gearing. Section 26-159 carries new-build status across for capital gains tax purposes, so that treatment is not lost in the transfer.

The changes apply from the 2027–28 income year, the same year quarantining begins.

The widow's tax fix travelled in a wider package. The same Act introduced a loss carry-back tax offset for corporate tax entities that are not significant global entities, and a permanent $20,000 instant asset write-off for small business entities, both from 1 July 2026. It also included an employment income exemption for PNG Chiefs Limited.

Hypothetical example: a jointly owned unit

This is a simplified, hypothetical illustration.

Helen and Tom own an established investment unit as joint tenants. They bought it in 2018, so it is grandfathered. Each year it makes a net rental loss of $12,000, shared equally.

Tom dies in 2029 and Helen, as surviving joint tenant, acquires his half. Her original half was always grandfathered.

Without the new law, Tom's half would have been treated as a post-Budget acquisition. Around $6,000 of the annual loss could then have been quarantined, rather than offset against Helen's other income.

Under section 26-156, Helen is treated as having acquired Tom's interest before Budget time. The full $12,000 loss can continue to be deducted against her other income, subject to the usual rules.

A similar outcome would follow if a separating couple's grandfathered property were transferred to one partner under family law orders.

That matters in property settlements. Without the fix, a grandfathered rental could have become a less attractive asset once transferred, which might have complicated negotiations over who keeps which property.

Grandfathering does not cover capital gains

One point is easily missed. The widow's tax fix preserves negative gearing, but it does not preserve the 50% CGT discount on future growth.

From 1 July 2027, gains accruing on all assets held by individuals, including grandfathered properties, will be calculated using cost-base indexation, with a 30% minimum tax for resident individuals. Growth before that date keeps the 50% discount through the deemed sale and reacquisition rules in the No. 1 Act.

Who is not covered

Based on the text of the new sections, the protection is targeted. It covers surviving spouses, surviving co-owners and spouses or former spouses on relationship breakdown.

The sections do not appear to extend to children or other relatives who inherit a property they did not already co-own. For those beneficiaries, the ordinary post-Budget rules may apply, and specialist advice may be worthwhile.

Separately, Treasury's tranche 2 exposure draft, the Tax Reform No. 3 Bill, includes measures dealing with testamentary trusts, deceased estates and special disability trusts. Consultation closed on 21 August 2026, and those measures are not yet law.

What to watch next

The new rules first matter in the 2027–28 income year, starting 1 July 2027. That leaves time for the detail to be settled. Watch for ATO guidance on how surviving spouses, co-owners and separating couples should show their position in a tax return.

Executors and family lawyers may also need to consider the new sections when finalising estates or property settlements that include established rental properties.

Families may find it useful to keep records showing when a property was first acquired, how it was owned, and the date and basis of any transfer, such as a will, probate documents or family law orders.

Investors should also watch for the Tax Reform No. 3 Bill, which the NTAA expects before the end of 2026. A registered tax agent or estate planning adviser may help families understand how the rules apply to their circumstances.