'It's a quarantining regime': expert breaks down new negative gearing rules

Schedule 2 to the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 introduces a quarantining regime for losses on negatively geared residential dwellings held by an individual, a trust, or a company.

From 1 July 2027, expenses relating to residential dwellings used or held as residential accommodation will be deductible only against assessable income from dwellings subject to quarantining, net income from dwellings not subject to quarantining, and revenue or capital gains on residential dwellings.

National Tax & Accountants’ Association senior advocate Robyn Jacobson said the measure is being widely misread as the end of negative gearing.

“This isn’t a straight abolition of negative gearing. It’s a quarantining regime,” she said. “You don’t necessarily lose the benefit of negative gearing – losses can be carried forward and offset against future profits and gains from residential property in later years.”

The rules apply to established residential dwellings acquired on or after 7:30pm AEST on 12 May 2026, tested by reference to when the contract is entered into. Dwellings acquired before that time are excluded outright, including those acquired under a contract entered into pre-budget, even if it had not settled by budget night. Those acquired on or after budget night can remain negatively geared against other income until 30 June 2027, before the new rules commence. No restrictions apply to new residential dwellings which genuinely add to the supply of housing in Australia, including those acquired after budget night.

A portfolio test, not a property test

Jacobson said the most common misconception is that a loss is trapped in the property that generated it.

“Negative gearing losses from one residential property can be applied against the net profit or gains from other residential properties,” she said. “Quarantining will not apply on a per property basis. It is not designed to quarantine losses at an individual property level, where the owner has to wait for that property to become positively geared before realising the loss.”

The calculation runs to six steps. Excluded entities – widely held trusts, complying superannuation entities including SMSFs, and a class of excluded entities – stop at step 1. Other taxpayers net their rental income and losses across quarantined dwellings and add any prior year quarantined amount. That excess is then reduced by net rent from excluded dwellings and by revenue gains on residential dwellings. What remains is the quarantined amount, which is applied first against deferred residential capital gains, then residential capital gains. Any balance is carried forward, and the steps repeat the following year.

Jacobson noted that other asset classes are untouched.

“The negative gearing changes do not apply to other investments, such as shares or commercial property,” she said. “What we can’t do is apply our negatively geared losses from the quarantined properties against the income and the gains from those investments.”

Foreign residential property is caught. The new build exclusion requires the minister to be satisfied that the dwelling genuinely adds to the supply of residential dwellings in Australia – a test offshore property cannot meet.

Because losses will take longer to recoup, Jacobson said record-keeping obligations will extend well beyond the year the loss arises.

“The five-year record-keeping period runs from five years after losses are recouped, not from when they were incurred,” she said.

“Under these rules, you could be carrying the loss forward for many years after it was originally incurred, so it will increase the length of the period that people may need to maintain their records.”