Most property investors breathed a small sigh of relief when the Federal Government announced that pre-announcement investment properties would be largely grandfathered under the 2026 Budget changes to negative gearing and Capital Gains Tax.

If you bought before 12 May 2026, you assumed you were protected.

For many investors, that assumption is correct. But there is a specific scenario where grandfathering can be lost entirely, and most people have not been warned about it.

If you own an investment property jointly and one owner dies, or if you and your co-owner separate and transfer the property as part of a family law settlement, the grandfathered treatment may not survive that change in ownership.

What the New Rules Actually Say

Under the Federal Government’s 2026 Budget, the negative gearing and CGT rules change from 1 July 2027.

Negative Gearing

From 1 July 2027, negative gearing will be restricted for newly purchased established properties. If you buy an established investment property after 7:30pm on 12 May 2026, you can only offset rental losses against other property income, not against your salary or other income.

New builds are not affected. Full negative gearing remains available on newly constructed properties to encourage housing supply.

Capital Gains Tax

The existing 50 per cent CGT discount is being replaced with a new system combining indexation and a 30 per cent minimum tax. This applies to established properties acquired after 7:30pm on 12 May 2026.

Grandfathering

Properties acquired before that date are largely protected. The old rules continue to apply, which means full negative gearing against all income and the existing 50 per cent CGT discount remain in place for those assets.

That protection is called grandfathering, and it is valuable. But it can be lost.

The Hidden Risk: Death and Divorce

The Government introduced a specific provision to prevent grandfathering from being extended through changes in ownership. The intent is straightforward: if ownership of a property changes hands after 12 May 2026, even due to circumstances outside your control, the transferred interest may be treated as a new acquisition under the new rules.

What Happens When an Owner Dies

When a jointly held investment property passes to a surviving spouse or beneficiary through an estate, the deceased owner’s share is effectively transferred. That transfer may trigger the new rules for the inherited portion.

This means the surviving spouse could end up with one half of the property still under the old grandfathered rules, and the other half under the new, less favourable rules. The practical effect is a split tax treatment on a single property, and it can be difficult to manage.

What Happens During Divorce or Separation

Family law property settlements often involve one party transferring their share of a jointly owned investment property to the other. Even though this is not a sale in the traditional sense, it is still a change of ownership.

That transfer could strip the grandfathered status from the transferred portion. The person who receives the extra share may then hold that portion under the new rules, losing access to full negative gearing and the existing CGT discount on that interest.

Why Did the Government Include This?

The Government’s stated intent was to prevent grandfathering from being extended indefinitely through deliberate ownership restructures. Whether that rationale covers genuinely involuntary transfers will depend on the final legislation and ATO guidance.

The details of how these provisions will operate in practice are still being worked through. This makes it even more important to seek proper advice now, before the rules are locked in.

Who Is Most Affected?

This provision will have the greatest impact on:

• Couples who own investment properties in joint names
• Families with estate planning arrangements that involve property transfer on death
• Surviving spouses who stand to inherit a share of a jointly held property
• Investors going through separation or divorce who hold property jointly with a former partner
• Family trusts or co-ownership arrangements where a change in beneficiaries or ownership structure could trigger the new rules

If any of these situations apply to you, this is worth discussing with your accountant, solicitor, and mortgage broker now, not after the change takes effect.

How Does This Connect to Your Borrowing Strategy?

Changes to negative gearing and CGT directly affect how investors structure their loans and portfolios. This is where your mortgage broker plays an important role alongside your tax adviser.

Loan Structure and Ownership Structure Are Linked

How you hold a property, whether jointly, in one name, through a trust, or via a company, affects both your tax outcome and your borrowing capacity. A change to ownership structure, even one forced by personal circumstances, can have lending implications as well as tax implications.

For example, if a jointly held property is transferred to one person following a separation, the lender holding the mortgage needs to be notified and will reassess serviceability in the name of the remaining borrower. This can affect the ability to retain the loan, the interest rate, and future borrowing capacity.

Interest Only vs Principal and Interest

Under the grandfathered negative gearing rules, many investors use interest-only loans to maximise their tax deduction on interest expenses. If grandfathering is lost on part of the property, the deductibility rules change and the loan structure that made sense before may no longer be optimal.

This is a conversation your mortgage broker and accountant need to have together, ideally before anything changes.

Equity Access and Future Investment Plans

Many investors plan to use equity in existing properties to fund future purchases. If the tax treatment of an existing property changes due to death or divorce, the numbers behind that equity strategy may shift as well.

Reviewing your current loan structure, LVR position, and equity access plan in light of these changes is a sensible step for any investor with jointly held properties.

What Should You Do Now?

You cannot control whether a family law matter arises or what happens to a co-owner’s health. What you can control is how well-prepared you are before any of these events occur.

1. Review your current ownership structure with your solicitor or estate planning lawyer. Understand how your property would transfer on death and whether that creates a tax problem.
2. Speak with your accountant about the grandfathering provisions and how they apply to your specific properties. Ask directly about the death and divorce exception.
3. Review your loan structure with your mortgage broker. Make sure your current interest-only or principal-and-interest arrangement still makes sense if tax treatment changes.
4. Check whether your properties are correctly titled. Joint tenancy and tenants in common have different legal and tax implications, including on death.
5. If you are already in a separation, act quickly. The longer a jointly held investment property sits in both names after a relationship ends, the more complex the eventual transfer becomes.

A Quick Summary of the Negative Gearing and CGT Changes

The following outlines what changes and what stays the same from 1 July 2027, based on current proposals.

Established Properties Bought Before 12 May 2026

• Full negative gearing continues, subject to the death and divorce exception
• Existing 50 per cent CGT discount continues, subject to the same exception

Established Properties Bought After 12 May 2026 at 7:30pm AEST

• Negative gearing losses can only offset property income, not wages or other income
• CGT discount replaced with indexation and a 30 per cent minimum tax rate on gains

New Builds (Any Purchase Date)

• Full negative gearing is retained to encourage housing construction
• Standard CGT rules apply

The Role of Estate Planning in Property Investment

This rule change is a timely reminder that property investment is not just a finance decision. It is also a legal and estate planning decision.

Many investors set up jointly owned properties years ago without thinking about what happens on death or separation. The tax environment was different, and the rules were simpler. That is no longer the case.

If your investment property forms a significant part of your wealth, it deserves the same level of planning attention as your superannuation or business interests. Speaking to an estate planning solicitor alongside your mortgage broker and accountant is no longer optional for serious property investors.

How Laxmi Home Loans Can Help

At Laxmi Home Loans, our role is not to give you tax or legal advice. That is the job of your accountant and solicitor. Our role is to make sure your loan structure supports your goals and gives you the flexibility to respond when circumstances change.

We help investors review their current loans, understand their equity position, and plan their next move in a lending environment that is changing alongside the tax environment.

We work with clients across Australia and speak English, Nepali, and Hindi. If you want to talk through how these changes might affect your borrowing strategy, we are available for a free conversation.

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