Negative gearing from 2027-28: what the Act actually does

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 — Act No. 49 of 2026 — received Royal Assent on 26 June 2026. Schedule 2, which inserts new sections 26-155 and 26-160 into the Income Tax Assessment Act 1997, commenced on 27 June 2026 (the day after assent). This is no longer an announcement, a proposal or a bill before the Parliament.

Two practical consequences follow. Cash-flow modelling that assumes a residential rental loss will reduce salary income is still correct for 2025-26 and 2026-27, and becomes unreliable for 2027-28 onwards. And because the first affected year does not begin until 1 July 2027, there is time to get records — particularly acquisition records — in order before it does. Other schedules of the same Act apply on their own timetables; Schedule 1 (capital gains tax) is covered in our companion resource on the CGT discount changes from 2027.

New s 26-155(1) works on a single comparison, made across your whole residential portfolio for the income year — not property by property. You compare the total amounts you could otherwise deduct relating to using or holding residential dwellings as residential accommodation against your total assessable income from using or holding residential dwellings as residential accommodation. If the deductions exceed that income, the Act deals with the excess — and only the excess.

Two integration rules soften the calculation before anything is quarantined. Under s 26-155(6), the excess is first reduced by (a) the amount by which the income from your excepted dwellings (those covered by s 26-155(2) — see below) exceeds the deductions for them, and (b) any gain you realised for the year from a realisation event on a residential dwelling that is a revenue asset. Under s 26-155(7), an amount included in your assessable income under Division 6 of Part III of the ITAA 1936 in relation to a trust’s net income is treated as your residential-dwelling income to the extent it is referable — directly, or indirectly through interposed partnerships or trusts — to using or holding residential dwellings. Interposing a trust does not strip the character of the income.

One route is expressly closed. New ss 110-38(8A) and 110-55(9JA) provide that expenditure does not form part of any element of the cost base, or of the reduced cost base, to the extent s 26-155 prevents it being deducted. Denied expenditure cannot simply be pushed into the cost base to shrink a future capital gain.

This is the point most easily overstated. A quarantined amount is not a general capital-loss-style deduction. Steps 3 and 4 of the amended s 102-5 method statement apply it first against deferred residential capital gains, then against residential capital gains — and nothing else. It cannot touch a gain on shares, a business asset or commercial property.

• It is applied after capital losses and prior-year net capital losses (steps 1 and 2 of the method statement).
• It is applied before step 5 — the step at which the CGT discount percentage is applied. So it is consumed against the gross gain, not the discounted gain.
• What a quarantined amount is ultimately worth is not something we quantify here. It depends on whether and when you have a residential capital gain to apply it against, and on the Schedule 1 rules — the discount percentage and cost-base indexation — that apply to that gain. Those differ by asset and by taxpayer, and the interactions are not settled, so this resource publishes no valuation of a quarantined amount and no post-1 July 2027 capital gains calculation.
• "Residential capital gain" and "deferred residential capital gain" are defined terms introduced by Schedule 1 of the Act, apportioned by residential-accommodation days over the relevant ownership period. Their mechanics — and the deemed sale and reacquisition just before 1 July 2027 that sits underneath them — are set out in our CGT discount changes resource.

Section 26-155(2)(a) directs you to disregard amounts — both deductions and assessable income — to the extent they relate to "an ownership interest in a residential dwelling you last acquired before 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2026". The common shorthand ("if you bought before 12 May 2026 you’re fine") drops three load-bearing features of the test.

Note what grandfathering does and does not do. It does not exempt a property from tax; it directs that the deductions and the income relating to that interest are left out of the s 26-155(1) excess calculation. And under s 26-155(6), net income from those excepted dwellings reduces the excess arising from your other dwellings before anything is quarantined.

A residential house or apartment let on a short-stay basis remains a residential dwelling — the s 26-160(1) exclusions turn on the kind of dwelling, not on how it is let. Purpose-built student accommodation connected with an education institution is a different matter, and sits outside the rule.

There is also a Minister-determined activity or purpose exception in s 26-155(2)(c). Section 26-155(3A) tells us what would justify the Minister making such a determination — improving the availability of social or affordable housing, or housing outcomes for particular disadvantaged groups. That is a constraint on the power, not a self-executing exception. No determination had been made as at 13 July 2026, so there is presently no exception under paragraph (2)(c) at all, and nothing here should be read as saying that social, affordable, disability or aged housing is carved out.

What can honestly be said is only this. Section 26-160(4) permits the Minister to make requirements about matters including the kind of dwelling; the kind of interest you hold and the circumstances in which you acquired it; circumstances relating to how the dwelling was created; and whether the dwelling has separate title. Section 26-160(4A) requires the Minister, before determining requirements, to be satisfied that doing so "will assist in achieving the objective of genuinely adding to the supply of residential dwellings in Australia". Section 26-160(5) allows the requirements to relate to matters or circumstances existing before the section commenced.

What cannot be said is anything about outcomes. Whether a knock-down rebuild, a substantial renovation, an off-the-plan purchase or the later purchase of a recently built dwelling will qualify is unresolved on the face of the Act. Note too the phrase "in relation to you" in s 26-155(2)(b): the same dwelling may end up being a new residential dwelling for one taxpayer and not for another, depending on what the Minister determines. Anyone telling you today what will count as a new build is speculating.

• The timing of the benefit changes, not the existence of the deductions. From 2027-28 an excess of residential deductions over residential income no longer reduces salary in the year it arises; it waits.
• The benefit is deferred, and its value is contingent. A quarantined amount does something for you only when there is later residential income to absorb it, or a residential capital gain to apply it against. It is applied before the step 5 discount, against the gross gain — but what it is finally worth turns on the Schedule 1 rules applying to that gain, which this resource does not model.
• Records become decisive. The grandfathering test turns on when each ownership interest was last acquired, and — for contracts — on the contract date. Contracts of sale, transfer documents and any later dealings in the interest are the evidence.
• Aggregation matters. Because the test is portfolio-wide, a positively geared dwelling and a negatively geared dwelling in the same year interact. A portfolio that is net positive across residential dwellings on its current-year figures produces no excess to quarantine for that year — but a quarantined amount carried forward from an earlier year re-enters the comparison on the deductions side (s 26-155(1)(c)), so one net-positive year does not necessarily clear an accumulated balance.
• Structures deserve care, not haste. Trusts do not sidestep the rule (s 26-155(7) traces the income through), and the entity carve-outs are technical features of the Act rather than a plan of action. Any structural change should be tested against your own facts and the whole body of tax law, not against one section.
• Two instruments are still outstanding. Until they are made, the picture is incomplete, and anyone acting on assumptions about them is acting on speculation.

If you would like your own position worked through — including how a rental schedule prepared under rental property tax would look in 2027-28, and what that implies for tax planning — that is a conversation to have with a registered tax agent who can see your records. This resource is general information only.