What happens to your negative gearing when the property passes to your kids or in divorce?

The Government told investors their existing negative gearing was safe “for as long as you hold it.” Read the actual Bill and that promise has a hole in it, one that opens the moment a property passes to a spouse or to the children. The fact that nobody intended this is the whole problem.

When the Treasurer reassured property investors that their existing negative gearing was grandfathered and untouched, most people heard a guarantee. Read the draft law and the guarantee springs a leak. Not through sale, but through the two events no family ever plans for: death and divorce.

Here is the mechanic, because it is the whole story. The 2026 to 27 Budget tax package, now the Treasury Laws Amendment (Tax Reform No. 1) Bill 2026, does two separate things to an established residential investment property, and it does them in two separate corners of the tax law. Almost every summary you will read treats them as one rule. They are not the same rule, and the difference is exactly where families get caught.

The capital gains rules look after families. The negative gearing rule does not.

On the capital gains side, the law has always thought about families. When you die, your beneficiaries step into your shoes, inheriting your cost base and your capital gains history under the long-standing death rules in section 128-15. When a marriage ends and a property moves between spouses under a court order or a binding financial agreement, the marriage breakdown rollover in Subdivision 126-A does the same job automatically. The capital gains clock keeps ticking as though nothing changed hands.

The negative gearing grandfathering does none of that, because it does not sit in the capital gains rules at all. It lives in a separate provision, proposed section 26-155, and its test has nothing to do with the property. It is about the person. The protection applies to a taxpayer who held an ownership interest in the dwelling before 7.30pm on 12 May 2026. That is an owner test, bolted to one individual and one date. Now hold those two facts side by side and watch what happens to an ordinary family.

Case study one: the inheritance

Margaret bought a rental unit in Southport in 2019 for $480,000. It runs at a loss of around $14,000 a year, which she offsets against her salary in the ordinary way. Because she owned it well before Budget night, it is fully grandfathered, and nothing about the 2027 changes touches her. Margaret dies in 2031 and leaves the unit to her son, David, who keeps it as a rental.

On the capital gains side, David is looked after. He inherits Margaret’s cost base and her ownership history, and no capital gains tax is triggered by the inheritance itself.

On the negative gearing side, David has a problem. Did he hold an ownership interest in the unit before 12 May 2026? On a plain reading of the Bill, no. He acquired it in 2031, the day his mother died, five years after the cut-off. The capital gains history rolled over to him. The negative gearing grandfathering did not. David may now find his rental losses quarantined, deductible only against residential rental income or a future capital gain, and no longer against his wage. Same unit, same family, and a benefit the Government called permanent has quietly died with Margaret.

Case study two: the settlement

Mark and Lisa bought an investment townhouse in Robina in 2021, owned half each. It is negatively geared and fully grandfathered. In 2030 they divorce, and under their property settlement Lisa takes full ownership of the townhouse.

On the capital gains side, the rollover does its job. No capital gains tax is triggered on the transfer of Mark’s half to Lisa, and she inherits his cost base.

On the negative gearing side, the result is close to absurd. Lisa’s original half was held before Budget night, so that share stays grandfathered. The half she received from Mark in 2030 is, on a plain reading, a fresh acquisition by her after Budget night. Lisa could end up owning one townhouse with two tax personalities: half of it still negatively geared against her income, the other half quarantined. One property, one owner, two sets of rules, decided by the date her marriage ended.

This is a mistake, and you can see how it was made

This is almost certainly an accident. Nobody in Treasury sat down and decided that dying or separating should cost your family their negative gearing. It is a drafting gap, and the reason it exists tells you everything about how this reform was built.

This is the most far-reaching rewrite of the capital gains tax system in twenty-five years, and it was introduced with no prior public consultation on the capital gains and negative gearing measures. Core parts of the design, including how the law’s own central terms are defined, have been pushed off into ministerial instruments that have not been written yet. The whole package was then run through a Senate committee on a compressed timetable. The professional bodies have already warned that committee the Bill is full of unresolved interactions with the existing tax law. The death and divorce gap is one of them. It will not be the last one we find.

That is the real story. Not one faulty clause, but a process that was always going to produce faulty clauses. When you legislate this fast, this broadly, and consult this little, you do not get clean law. You get gaps that land on ordinary families at the moment of a death or a separation, and a profession left to guess at what the Government actually meant.

So what should you do? Right now, nothing.

Here is the only sensible instruction while this remains a Bill and not yet an Act. Do not act on it.

•     Do not transfer, gift, or restructure a grandfathered property to lock in a status that is not settled.

•     Do not rebuild your estate plan around a guess at how this resolves.

•     Do not let a property settlement be driven by a negative gearing outcome the law has not decided.

The Bill can be fixed before it passes, and the fix is obvious: a simple rule that lets the grandfathering follow the same family rollovers the capital gains rules already respect. Until that happens, the right move is to know the gap is there, keep your acquisition dates and contracts on file, and wait. Acting early on an unresolved provision is how an investor turns the Government’s mistake into their own.

We are watching the amendments closely. If you hold an established investment property and there is a death, an inheritance, or a relationship change anywhere on your horizon, this is worth a conversation. It is not worth a transaction.

This article is general information only. It does not take into account your objectives, financial situation or needs, and it is not personal financial or tax advice. The measures discussed are contained in a Bill before Parliament and are not yet law; they may change. You should not act on this information without seeking advice tailored to your circumstances.

Wealth Effect Group is a Corporate Authorised Representative (AR 395157) of Boston Reed Ltd (AFSL 225738).