Property investors are the one group affected by both halves of the 2027 tax reform — the CGT treatment of a later sale and the negative gearing quarantine on some purchases. They are usually described as two unrelated mechanics that happen to land on the same person.
They are not unrelated. There is a provision that wires them together, and it decides what happens on sale to a quarantined loss you never get to use.
Two changes, two different tests
The CGT changes apply on sale. For ordinary assets, post-reset growth moves to CPI indexation and a possible minimum-tax top-up. A deferred pre-reset gain can retain the 50% discount when the later sale meets the holding-period test, while specified residential assets keep separate discount treatment. See The 2027 Tax Changes Explained for the mechanics.
The negative gearing quarantine applies annually to net rental losses on established residential dwellings contracted at or after 7:30pm AEST on 12 May 2026, subject to entity and fringe-benefit exceptions and any purpose the Minister determines. The grandfathering guide explains the tests.
One timing point that catches people out: the quarantine does not start when the CGT change does. Schedule 2 item 5 applies it to the 2027-28 income year and later, so a non-grandfathered property still deducts its rental loss against salary in full for 2026-27.
The provision that connects them
Here is what almost no summary of this reform mentions.
Schedule 2 items 2 and 3 insert section 110-38(8A) and s110-55(9JA). Expenditure that s26-155 prevented you deducting does not form part of the cost base.
Read that alongside the quarantine and the consequence is plain. A quarantined rental loss is meant to be recoverable — carry it forward, offset it against residential rental income or a residential capital gain later. But if your residential rental income and residential capital gains never absorb the pool, those dollars are not merely stranded. Costs of owning the property, such as interest, rates and insurance, form the third element of the cost base under s110-25(4) when they are not deductible. Section 110-38(8A) stops a quarantined amount getting there. So you lose the deduction and the amount gets no cost-base relief either.
That is not a second tax on the same dollar. Before the reform these holding costs were deductible, and s110-45(1B) already kept deducted second- and third-element expenditure out of the cost base. For these costs your cost base ends up where it would have been under the old rules. And selling is itself a way to use the pool: s102-5(1) steps 3 and 4 apply any quarantined amount still unused in the year you sell against that year's residential capital gains, including the gain on the property you sold, before the discount is worked out. What is lost for good is only a part you never deduct or apply against a residential capital gain.
Where the two changes meet
A quarantined cost gets no cost-base relief
| On sale | Taxable gain | Income tax (excl. Medicare levy) |
|---|---|---|
| Comparison only: if the expenditure stayed in the cost base | $131,800 | $52,660 |
| $40,000 kept out of the cost base, before the quarantined amount is applied | $171,800 | $70,660 |
| After $40,000 of the quarantined amount reduces the gain | $151,800 | $61,660 |
This is income tax only. It leaves out the Medicare levy, the Medicare levy surcharge, HELP repayments and the rest of your tax return, so what you pay in total can be higher.
Income tax on sale compared with a cost base that kept the expenditure
$9,000.00
more tax on this sale than the comparison row
Under s110-38(8A) the amount gets no cost-base relief. $40,000 of the $40,000 quarantined amount reduces the gain on this sale (s102-5(1) steps 3 and 4): $40,000 against the gain up to 30 June 2027, before its discount, and $0 against the gain after it.
This is not extra tax compared with the rules before the reform. Then these holding costs were deductible, and s110-45(1B) already kept deducted holding costs out of the cost base. Only a part that is never deducted or applied against a residential capital gain is lost for good.
Resident individual, dwelling rented out throughout, no other capital gains or losses that year, sold after the reset, illustrative CPI movement. The CGT Calculator 2027 New Rules accepts the unused quarantined amount separately from the cost-base exclusion, for a dwelling used solely for residential accommodation throughout ownership.
The distinction that matters is whether you ever receive the deduction. A quarantined amount you later deduct against residential rental income delivers its tax benefit later, but deducted second- and third-element expenditure is still kept out of the cost base under the ordinary rules. An amount you apply against a residential capital gain reduces that gain instead, and it is still kept out of the cost base, so it counts once. A quarantined amount you never deduct or apply against a residential capital gain gets no tax benefit at all, and the reform provision also keeps it out of the cost base.
Which one you end up with depends on something you cannot control precisely: whether your residential rental income or residential capital gains over the years turn out to be enough to soak the pool up. An investor with a single negatively geared dwelling and no other rental income has one main route to using it: the capital gain when that dwelling is sold. Whatever that gain does not absorb carries forward again under s26-155(1)(c).
The denial applies after the reset, in full
For a property held across 1 July 2027, the cost-base denial applies to expenditure incurred after the reset. It does not alter the original cost base used to work out the deferred pre-reset gain.
That means every denied dollar is kept out of the post-reset cost base in full, before indexation and tax are worked out. The denial leaves the deferred pre-reset gain, including any discount it qualifies for, unchanged.
The quarantined amount itself runs the other way. When you sell, s102-5(1) step 3 applies it to the deferred pre-reset gain first, and step 4 reaches the post-reset gain only with what is left. Where the deferred gain qualifies for the discount, the amount is applied before the discount, so it removes less taxable gain there than it would against the post-reset gain. The calculator above shows both effects.
A property bought after 1 July 2027 also has no pre-reset leg, so the exclusion applies within its post-reform cost base.
What is not touched by this Act
State taxes are untouched — stamp duty and land tax are state matters and this is a federal income tax Act. Ordinary rental deductions and depreciation are unaffected too: the quarantine bites on the net loss after all deductions, not on the deductions themselves.
The 30% minimum tax top-up is worth one clarification for anyone holding property in a structure. Section 119-10(1)(a) applies that charge to individuals. A trust does not owe it in its own right, though it can reach an individual beneficiary on their share of an attributed gain.
If you are grandfathered
Negative gearing works exactly as it does now. The Negative Gearing Calculator and Rental Yield Calculator apply unchanged, no pool accumulates, and s110-38(8A) never engages because nothing was ever quarantined. Your remaining exposure may be the CGT treatment on an eventual sale, but the reset, indexation and minimum-tax rules depend on the holder, residency and asset type.
If you are not
Two things change rather than one, and only the first is widely discussed.
The annual one: from 2027-28 the loss stops reducing your salary income, so the after-tax cost of holding a loss-making property rises in the year it occurs. A carried-forward loss saves you nothing until it is actually applied.
The eventual one: any part of the pool you never deduct or apply against a residential capital gain is lost for good, and s110-38(8A) means it gets no cost-base relief when you sell either. That makes the question "will my residential rental income and residential capital gains, including the gain when I sell, ever absorb this?" a question about whether the loss is ever worth anything, not just about timing.
What to do about it
Track the pool separately from the moment it starts. You need to know, at sale, how much was deducted, how much was applied against an earlier capital gain and how much is still unused. The first split is what s110-38(8A) turns on, the unused balance is what reduces the gain on sale, and neither is something you can reconstruct later from a tax return.
Record the 30 June 2027 market value of each property the reset reaches. It is the default reset value, subject to any available apportioning-method choice.
Do not assume selling ahead of the change helps. For an ordinary asset reached by the reset, the deferred pre-reset gain may keep its discount when the later sale meets the holding-period test. The crystallise-or-hold question has a real answer and it depends on your own numbers.
Frequently Asked Questions
No. Negative-gearing grandfathering does not decide the CGT result. A disposal from 1 July 2027 must still be tested under the transition, residency, asset-type and pre-CGT rules.
Only the part you eventually deduct, or apply against a residential capital gain such as the gain when you sell the property. Any part you never deduct or apply against a residential capital gain is lost, not deferred, and s110-38(8A) keeps quarantined amounts out of the cost base. Before the reform, deducted holding costs were already outside the cost base under s110-45(1B), so the cost base is no smaller than it would have been.
The 2027-28 income year. A non-grandfathered property still deducts its loss against salary in full for 2026-27.
The Act does not settle it, and "new residential dwelling" is still not defined in law. At 15 August 2026 there was only Treasury's August 2026 exposure draft, which proposed a test — genuinely adding to housing supply, acquired within 24 months of the certificate of occupancy — and said the final definition would go into primary legislation rather than the Ministerial instrument originally contemplated. A Bill has since been introduced: the Treasury Laws Amendment (Tax Reform No. 3) Bill 2026 was introduced on 14 October 2026 and passed the House of Representatives on 29 October 2026; at that date it had yet to pass the Senate. As introduced, each of its four routes to "new" requires the dwelling's certificate of occupancy to have been first issued at or after 7.30 pm (ACT legal time) on 12 May 2026 (proposed s960-590(1)(e)-(4)(e)). Every route also requires your interest in the dwelling to be a legal interest capable of being acquired by another entity (proposed s960-590(1)(d), (2)(d), (3)(d) and (4)(b)). For an extra dwelling added to a parcel, that certificate must also be first issued at or after the time you acquired the land, and your interest must be capable of being acquired independently of the other dwellings on the land, so a second dwelling that cannot be sold separately, such as a granny flat on the same title, would not count (proposed s960-590(2)(d)-(e)); a building converted into several dwellings carries the same separate-interest condition (proposed s960-590(3)(d)). The Bill limits the 24 months to a dwelling bought from another owner for whom it was new (proposed s960-590(4)); a transitional rule extends that route to a dwelling first certified before the cutoff, bought within 24 months of that certificate from a seller who owned it before the cutoff and has held it for sale ever since. No route applies where it is reasonable to conclude the dwelling came out of a scheme with a principal purpose of getting the tax benefit of treating it as new (proposed s960-590(5)). A renovation of an existing dwelling is not one of the routes. Nothing is enacted, so this is a question for your accountant on the specific facts.
The quarantine reaches residential dwellings only, so commercial property is outside it. The CGT change applies to capital assets broadly, commercial property included.
The cutoff of 7:30pm AEST on 12 May 2026 has passed. Any purchase from here is either an established dwelling subject to the quarantine or a new dwelling that is grandfathered regardless of date. Whether a purchase makes sense turns on far more than one tax rule.