Highlights

  • Draft rules released in 2026 would generally allow a home acquired before the 2026 Budget cut-off to retain access to negative gearing when it is later rented out.
  • From 1 July 2027, losses on established residential properties acquired after 7:30pm AEST on 12 May 2026 are set to be quarantined rather than deducted against salary or other income.
  • The draft seeks to prevent the tax law's deemed Acquisition rule for former main residences from changing the property's relevant acquisition date for negative gearing purposes.
  • The proposed former-home treatment remains draft law and could change before legislation is introduced and passed.

Australia's 2026 property tax reforms are reshaping how rental losses are treated when homeowners move out and convert a former residence into an Investment property. Under draft rules released in August 2026, a home acquired before the Budget cut-off would generally keep its original acquisition date for negative gearing purposes, even if it only begins producing rental income after the new regime starts. The distinction matters because the enacted changes apply different treatment to established properties acquired before and after 12 May 2026.

What the Enacted Negative Gearing Changes Do

The first stage of the reforms became law in June 2026 and is scheduled to apply from 1 July 2027. Under the new framework, net rental losses on established residential properties acquired after 7:30pm AEST on 12 May 2026 will generally be quarantined. Instead of reducing wages or other non-property income, those losses can be carried forward and used against residential property income and gains in later periods.

Properties held before the Budget cut-off are grandfathered, while qualifying new residential dwellings retain access to negative gearing. Established homes acquired after the cut-off are therefore treated differently once the new rules take effect.

Why Former Homes Needed a Specific Draft Rule

A separate Capital Gains Tax rule can treat a former main residence as having been acquired at Market Value when it first starts producing assessable income. Without an adjustment, that deemed acquisition date could potentially make an older home appear to have been acquired after the 2026 Budget cut-off for negative gearing purposes.

The 2026 exposure draft addresses this by proposing that the deemed acquisition time be disregarded when deciding whether the property is subject to rental-loss quarantining. The owner's original acquisition date would instead be used for this specific purpose.

How the Draft Would Apply

Under the draft approach, a home bought before 7:30pm AEST on 12 May 2026 and later converted into a rental would generally remain outside the quarantining rules. A qualifying new dwelling would also retain negative gearing treatment. By contrast, an established home acquired after the Budget cut-off and later rented out would generally have its net rental losses quarantined from the 2027-28 income year.

The draft also includes related continuity rules for certain property transfers, including some situations involving deceased estates, co-ownership changes and relationship breakdowns. These provisions are intended to preserve the relevant acquisition status in specified circumstances.

Draft Status Remains Important

The former-home provisions were released as exposure draft legislation in August 2026 and are not yet law. That means the final wording, scope and interaction with other tax provisions may change before any bill is introduced and enacted. The main-residence capital gains tax exemption is a separate issue and is not removed by the draft treatment described above.

Key Insights

The key dividing line is the property's original acquisition timing. The draft is designed to stop a later change in use from turning a pre-Budget home into a post-Budget acquisition for negative gearing purposes. For homeowners considering retaining a former residence as a rental, the final legislation will determine whether the proposed grandfathering treatment survives in its current form.