Residential Property Tax Changes: What Investors Need To Know

Residential property investors face a significant change in the tax treatment of rental losses and capital gains, with these changes taking effect from 1 July 2027.  For residential rental properties, the key date around ownership of the property is 12 May 2026; whether a property was held on that date, and whether a later purchase is an established or genuinely new dwelling, can materially affect the investor’s tax position.

This article will focus on the new law changes to Capital Gains Tax (CGT) as they relate to real estate and residential rental property income tax treatment.  In addition to these changes, the ATO has updated their interpretation of rental income and deductions in the context of holiday houses. Our earlier recap of those changes, subsequently finalised by the ATO, is here: ATO Targets Holiday Home Deductions: What the New Draft Rulings Mean for You – Accru

The existing negative gearing treatment is grandfathered and will continue to be unchanged for residential property held on 12 May 2026. Rental losses may continue to be deducted against other assessable income, subject to the ordinary tax rules.

This grandfathering applies even if the property was not rented on 12 May 2026. For example, an owner who acquired a home in 2012, lived in it and later moved out and rented it from 2027 could continue to deduct a rental loss against other income. This makes the acquisition date and evidence of ownership particularly important.

For properties acquired after 12 May 2026, the tax treatment differs depending on whether the property is considered a “new” residential dwelling or not.  If not, it is often referred to as an “established home”, but there are scenarios where new builds won’t qualify as “new” for negative gearing rules.

For an established residential property acquired after 12 May 2026, rental losses arising before 1 July 2027 may still be applied against other income. From 1 July 2027, rental losses will be quarantined rather than immediately deducted against salary, business or investment income. 

Quarantined losses will be carried forward and can be used against future positively geared residential rental income, or a capital gain on sale of residential property.  However, as we will see below there are some scenarios where these losses can’t be fully utilised.  

The quarantined losses are effectively a class of losses at the taxpayer level, rather than being tied to one particular property. This may help an investor with several rental properties, but it also creates a risk that losses remain unused if the investor exits residential property altogether.  See the example on CGT losses below.

The proposed rules are more flexible and favourable for a “new” dwelling acquired or constructed after 12 May 2026. Rental losses from a qualifying new dwelling may continue to offset other taxable income. From 1 July 2027, the investor will also have a choice between the general 50 percent CGT discount and indexation when calculating a gain on sale.

The final meaning of “new” will be set by legislative instrument. The current examples indicate that the dwelling must not previously have been sold and must genuinely add to Australia’s housing supply. A newly constructed apartment may qualify.

Replacing one house with two separately titled duplexes will add to supply and is expected to qualify as “new”, whereas demolishing one house and replacing it with one house would not. Investors should not assume that a recently renovated or rebuilt property will qualify and we await further guidance on some of these matters.

The proposed CGT reforms commencing on 1 July 2027 extend beyond residential property, but several features are particularly relevant to property investors.  To summarise, from 1 July 2027, cost base indexation (set to CPI) replaces the general 50% discount and pre-CGT status is also lost from that date onwards.  Furthermore, a minimum 30% tax is applicable to the indexed part of capital gains.

For assets already held before 1 July 2027, the new laws effectively grandfather pre-CGT status and the CGT discount (where applicable).  On 1 July 2027, it is deemed that all assets are re-acquired for their market value to set the basis for indexation going forward.

For assets acquired before 1 July 2027, a market value as at 30 June 2027 is the default basis for the indexation calculation.  There is currently a proposed apportionment method available for real estate (and assets without a readily ascertainable value at 30 June 2027), which has 9 steps and applies a daily compounding growth rate to the asset since acquisition. Upon eventual sale, taxpayers should have the choice of applying the method that gives them a better result.  Therefore, obtaining and retaining appropriate market valuation evidence at 30 June 2027 is an important planning step.

One significant change that can affect residential property is that the order for applying capital losses is prescribed from 1 July 2027. Capital losses are applied before quarantined residential rental losses, removing the taxpayer’s discretion over the order in which losses are utilised. In some circumstances, this may leave quarantined rental losses unused even where there are substantial gains in the same year.

Comparing the CGT outcome between a market value method and the apportionment formula on sale of property with the following inputs and no other CGT or rental losses to apply:

It is important to note that the key factors here are the market value as at 30 June 2027 and also the assumed inflation rate.  If inflation is lower, then the index factor is lower and the indexed part of the capital gain would be higher. 

From 1 July 2027, taxpayers need to classify their capital gains into 4 categories and then apply capital losses to their gains in the same order.  Quarantined rental losses are applied to residential property capital gains after capital losses.  In the steps below “deferred” is a grandfathered discount capital gain.

In this scenario, the taxpayer has current year capital losses of $50,000, carry forward capital losses of $1,200,000 and quarantined rental losses of $1,400,000.  The result is $220,000 of residential rental losses that carry forward and remain unused if this taxpayer has no further residential property investments.

The finalised and some still proposed changes make the acquisition date, property type as well as supporting records and valuation particularly important for residential property investors. Properties held on 12 May 2026 retain existing negative gearing treatment, while later acquisitions could face quarantined rental losses and different capital gains tax outcomes depending on whether the dwelling qualifies as new. Investors should review their property position before 1 July 2027, retain evidence of ownership and consider how best to establish a reasonable market valuation as at 30 June 2027. Please contact your Accru advisers if you are concerned about how these changes may affect you.