The problem the first Act created
The Tax Reform No. 1 Act keeps negative gearing for residential property "last acquired" before 7:30pm AEST on 12 May 2026. Inheriting a property, or taking it over after a death or in a divorce, counts as acquiring it. So under the first Act a surviving spouse inheriting a grandfathered rental would have lost negative gearing on it.
What the Tax Reform No. 2 Act changed
The Treasury Laws Amendment (Tax Reform No. 2) Act 2026, assented on 26 August 2026, added sections 26-156 to 26-159 to the Income Tax Assessment Act 1997. They apply from the 2027-28 income year.
| Situation | Grandfathering kept? | Section |
|---|---|---|
| Your spouse dies and you take over their interest (as surviving joint tenant or beneficiary) | Yes, if your spouse acquired it before Budget night | 26-156 |
| A co-owner who isn't your spouse dies and you take over their share | Yes, if you and they both acquired your shares before Budget night | 26-157 |
| You receive the property from a spouse or former spouse (or their company or trust) under a relationship breakdown order or agreement | Yes, if they acquired it before Budget night | 26-158 |
| Any of the above, for a new residential dwelling | Yes: it stays "new" for you, including the CGT choice | 26-156 to 26-159 |
| You move out of your home and rent it out | Yes, if you bought it before Budget night | 26-155(3AA) |
What isn't covered
- Other heirs. Children, siblings or anyone else inheriting from someone who wasn't a co-owner aren't covered by these sections. On our reading of the law, they acquire the property at the date of death, so an established home inherited after Budget night would have its losses quarantined from 1 July 2027.
- Voluntary changes of ownership. Adding a partner to the title, or transferring a share to family outside a relationship breakdown settlement, is a fresh acquisition of that share.
These are the points where the facts matter most, so get advice from a registered tax agent before an estate is distributed or a title is changed.
Questions people ask
If my spouse dies, do I keep their negative gearing?
Yes, from 2027-28. If your spouse acquired the property before 7:30pm AEST on 12 May 2026 and you take it over as surviving joint tenant or as beneficiary, you're treated as having acquired it before then too (s26-156).
What if I inherit from a parent?
The Act's extensions cover a spouse and a surviving co-owner, not other beneficiaries. On our reading, a child who inherits an established property is treated as acquiring it at the date of death, so if that's after Budget night its losses are quarantined from 1 July 2027. Check this with a tax agent: it turns on the facts.
We co-own with a sibling. What happens if one of us dies?
If you and your sibling both acquired your shares before Budget night, and you take over their share, that share is treated as acquired before Budget night too (s26-157).
Does a property settlement in a divorce break grandfathering?
No. If you receive the property from your spouse or former spouse, or from their company or trust, under a court order or a qualifying agreement, you're treated as acquiring it when they did (s26-158).
If I add my partner to the title, is their share grandfathered?
Probably not. Adding someone to the title is a new acquisition of that share, so a share acquired after Budget night would be caught. The relationship breakdown rule only covers transfers under a settlement. Get advice before changing ownership.
Does refinancing change anything?
No. Refinancing isn't an acquisition of the property.