Grandfathered vs new investments: records for changing negative gearing

Australia’s 2026–27 tax reforms keep full negative gearing for some properties but shut it down for many others, especially established residential investments bought after 12 May 2026. From 1 July 2027, losses on these new established properties will be quarantined to rental income, not wages.[^1] To benefit from grandfathering on older properties, you must be able to prove which loan, which expenses and which property sit under which rule set.

This guide shows you how to:

1. Sort every property into the right “grandfathered” or “new” bucket.
2. Set up loans, offsets and bank accounts so the tax tracing is clean.
3. Build simple, ATO‑ready records that protect your deductions and give you decision‑grade numbers.

If you do nothing else this week, aim to label each property, clean up your loans, and set up a digital record system. That alone will put you ahead of most investors when the new negative gearing rules land.

Start with a simple register of properties and loans, split by rule set.

1. Grandfathered vs new investments: what actually changes?

1.1 The two rule books for residential property

Based on the 2026–27 Budget measures and draft legislation:[^1]

• Grandfathered investments (old rules)

  • Generally: existing residential investments and qualifying new builds held before the reform dates.
  • Rental losses can still offset salary and business income (traditional negative gearing), subject to usual ATO rules.
  • Existing CGT settings continue, with transitional rules.

• New investments (post‑reform rules)

  • Mainly: established residential properties bought at or after 7:30pm AEST, 12 May 2026 and held from 1 July 2027.
  • Rental losses are quarantined: they can be used against rental income, not wages or business profits.
  • CGT concessions move to the new indexation and minimum‑tax framework.

The catch: one investor can easily be running both rule books at once. That’s why records matter.

For a deeper policy overview, see /insights/new-budget-negative-gearing-negative-gearing-on-investment-properties.

1.2 Why record‑keeping suddenly matters more

Under the old system, messy records were painful but often survivable. If the property was clearly rented and you had reasonable totals, many accountants could reconstruct enough to lodge.

Post‑reform, poor records create three specific dangers:

1. Losing grandfathering: If you can’t show which part of a loan belongs to a pre‑reform property, the ATO can deny wage‑offset deductions.
2. Denied interest deductions: Mixed‑purpose loans (home + investment) with no clean tracing are already on ATO radar. The new rules raise the stakes.
3. Bad decisions: You’ll be making hold–sell and refinance calls in a world where pre‑tax cashflow is king.[^2] Without reliable numbers by property, you’re flying blind.

2. Step 1 – Put every property in the right bucket

Before touching loans or spreadsheets, get clarity on which rule set applies to each property.

2.1 Build your property register

Create a simple table (spreadsheet or notebook) with one line per property:

Use contract date and type (new build vs established) to roughly assign:

• Bucket A – Grandfathered

  • Purchased before 12 May 2026, or qualifying new build under the reform definitions.
  • Rental losses can offset wages, subject to normal rules.

• Bucket B – Post‑reform

  • Established residential properties bought at or after 12 May 2026.
  • Losses quarantined to rental income from 1 July 2027.

Keep any ambiguity (e.g. off‑the‑plan, major renovation) clearly flagged so your accountant can confirm when the final law is settled.

2.2 Note who owns what and how

Add columns for ownership structure and percentage:

• Individual (you, spouse, partner)
• Joint tenants / tenants in common (with split %)
• Family trust / company
• SMSF

This matters because the new CGT and trust rules interact with negative gearing and quarantining. If you’re weighing up super vs personal purchases for the next deal, see /insights/hold-next-property-in-super-vs-personally-after-budget.

2.3 Worked example – classifying two properties

• Property A: Purchased 2019, established unit, in your own name, currently negatively geared.

  • Bucket: Grandfathered – full negative gearing continues.

• Property B: Purchase contract 20 June 2026, established house.

  • Bucket: Post‑reform – from 1 July 2027, rental losses can only offset rental income.

If both are secured to one big cross‑collateralised loan, you can already see why clean records and splits are crucial.

3. Step 2 – Clean up loans so interest is traceable

The ATO’s position is clear: deductibility follows use of funds, not what the loan is secured against. After 2027, they will be especially interested in how you’ve split loan interest between grandfathered and post‑reform properties.

3.1 Why purpose‑based loan splits are non‑negotiable

Across this content cluster, one principle keeps popping up:[^3]

Purpose‑based loan splits are the primary tool for separating pre‑ and post‑reform borrowing on each property, allowing clear tracing of interest to the correct negative gearing rule set.

In practice that means:

• One loan split for each property’s investment debt, where possible.
• Separate splits on your home loan for each equity release used as a deposit for a specific investment.
• No “everything in one big loan” structures.

For a fuller practical playbook on splits and offsets, see /insights/using-offsets-splits-redraw-track-old-new-tax-rules-properties.

3.2 Example – fixing a messy mixed‑purpose loan

Current situation:

• $900,000 loan secured against your home.
• $550,000 originally for the home, $350,000 redrawn over time for two investments (some pre‑, some post‑reform).
• No clear record of which redraw went to which property.

Better structure (illustrative only):

• Split 1 – $550,000 – Home only (non‑deductible).
• Split 2 – $200,000 – Deposit + costs for Property A (grandfathered).
• Split 3 – $150,000 – Deposit + costs for Property B (post‑reform).

From that point on:

• You don’t redraw from Splits 2 and 3 for non‑investment purposes.
• You track interest on Splits 2 and 3 separately for Schedule 3 (rental property) in your tax return.

3.3 ATO expectations – what you should be able to show

In an ATO review of rental deductions, anticipate requests for:

• Loan contracts and variation letters, showing dates and amounts.
• Drawdown and redraw history (bank statements) linked to property settlement statements.
• A spreadsheet or working paper that reconciles each loan split to each property and shows the proportion used for deductible purposes.

The closer your everyday banking matches this structure, the easier it is for your accountant to defend your position.