What negative gearing changes mean for inherited properties and former homes
“Widow tax” fixed
Federal Parliament has closed an unintended loophole in the recent negative gearing and capital gains tax reforms that became widely known as the “widow tax”.
At the same time, the Government also fixed a technical issue that could have affected people who first use a main residence to generate rental income after Budget night on 12 May 2026.
What are the key changes?
Property transfers after death or relationship breakdown: New rules protect the existing negative gearing treatment for certain residential property interests transferred from a spouse. Protection may also apply when someone inherits an additional interest from a co-owner who isn’t their spouse.
Former homes rented out for the first time: The “first use to produce income” rule is disregarded when determining the acquisition date for negative gearing purposes.
Records still matter: Property owners should retain clear records of the original purchase date and ownership history, and have their individual circumstances checked.
What was the “widow tax” problem?
The tax rules have recently been changed to ensure that losses generated from residential rental properties from 1 July 2027 can be “quarantined”. This means that they can only be offset against income or capital gains generated from other residential rental properties.
However, the changes won’t generally apply to properties that were purchased by the relevant taxpayer before 12 May 2026.
A problem could arise when an ownership interest in a property passes to someone as a result of the death of the original owner or because of a relationship breakdown, and this occurs after 12 May 2026.
Under the original version of the new rules, that transfer could be treated as a new acquisition. This could have meant that a surviving spouse or former partner risked losing the protected negative gearing treatment that had applied to the property in the hands of the previous owner.
How was the “widow tax” fixed?
The new rules specifically protect people who acquire a residential property interest from a spouse because of death or relationship breakdown.
The Government moved quickly once the issue was identified. The rules can also potentially protect someone who inherits an additional ownership interest in a rental property from a co-owner who isn’t their spouse.
Case study: Sarah inherits her spouse’s share of a rental property
Sarah and David bought a rental unit in 2019 as equal joint owners. The property has always been negatively geared, with annual rental losses of around $8,000 offset against their other income each year.
Under the original rules: The property was protected because it was acquired well before Budget night. However, if David had died and the property transferred fully into Sarah’s name, the additional 50% interest that Sarah inherited from David’s estate risked being treated as a new acquisition. Sarah could have lost the ability to claim the losses generated from this interest in the property against her other income.
Under the updated rules: That outcome is avoided. Because the transfer occurs due to the death of a spouse, Sarah keeps the original protected treatment and can continue offsetting the rental losses in the same way as before.
Will renting out a former home change its acquisition date for negative gearing?
The new rules specifically disregard the “first use to produce income” rule when determining the acquisition date for negative gearing purposes.
Under the original rules, there was a risk that an existing main residence purchased before 12 May 2026 could lose its protected status if it was later first used to generate taxable rental income after that date.
This was because of the interaction with a long-standing tax rule that can treat someone as if they had reacquired a former main residence when it is first used to produce income. The Government has now passed legislation to correct this.
Case study: James rents out his former home
James bought his home in 2018 and has lived in it as his main residence ever since. In 2027, he decides to move in with his partner and rent the property out for the first time.
Under the original rules: First renting the property after 12 May 2026 risked resetting its acquisition date. That could have caused the property to be treated as a post-Budget night acquisition and subjected to the tighter negative gearing limits.
Under the updated rules: That reset is disregarded for negative gearing purposes. Because James originally acquired the property before 7:30 pm on 12 May 2026, it keeps its original acquisition date. He can continue to offset any rental losses in the same way as if the property had always been an investment property acquired before Budget night.
Why do these negative gearing fixes matter?
Both changes remove sources of unexpected cash flow disruption.
The “widow tax” fix protects people at a difficult personal time. The main residence clarification gives homeowners greater flexibility if their circumstances change and they later decide to rent out a property they already own.
What should property owners do now?
If you own a jointly held investment property acquired before 12 May 2026: The “widow tax” fix provides reassurance that a future transfer on death or separation should not remove negative gearing rights. However, the rules are still complex, and it is always best to have the position checked.
If you own a main residence bought before 12 May 2026 and are considering renting it out: The new rule means the property should keep its original acquisition date for negative gearing purposes, but there could still be some complex CGT implications.
Keep clear records: Retain evidence of the original purchase date and ownership history.
If either situation applies to you and you would like confirmation of how the amended rules work in your circumstances, contact Collins Hume on 02 6686 3000.
