Labor Fixes Inheritance Trap in Negative Gearing Shake-Up

New draft legislation protects surviving spouses and divorcees from a negative gearing inheritance trap, with new carve-outs for affordable housing.

Labor Patches the Negative Gearing 'Widow Tax'

The Albanese government has released exposure draft legislation to fix an unintended consequence in its negative gearing reforms that critics warned would disproportionately hit widows and divorcees.

Under Labor's policy, announced in the May budget, negative gearing — the ability to offset rental losses against other income — was grandfathered for investment properties already owned at 12 May 2025. From July 2027, established investment properties purchased after that date would no longer allow owners to deduct rental losses from their taxable income.

The problem, quickly identified by ACT senator David Pocock, was what happened when a spouse in a jointly owned investment property died. Under the original drafting, the surviving partner could be treated as having acquired the deceased's share of the property after the grandfathering cut-off — suddenly losing the negative gearing treatment on half the investment. Pocock warned the measure would "disproportionately negatively impact women." Critics labelled it a "widow tax."

According to MPA Australia, the draft exposure legislation — open for public consultation until 21 August — addresses this directly. The negative gearing treatment will now follow the inheritance. A surviving spouse who inherits a partner's share of a jointly owned investment property will retain the same tax treatment that applied before their partner's death.

Who Else Is Protected — And What Is Changing

The fix extends beyond widows. The same protection applies to property received through divorce or separation settlements, meaning a partner who receives an investment property as part of a relationship breakdown will not be inadvertently caught by the post-May 2025 rules.

Pocock welcomed the draft but flagged that timing matters for the lending market. "It's critical that lenders are able to consider preserved benefit in assessing loan serviceability in decisions they are making now and in coming months," he said. That is a practical point: before a lender can account for the tax treatment of an investment property in a serviceability assessment, they need legislative certainty. Investors who have been waiting for clarity before refinancing or restructuring their debt now have a clearer picture — though the legislation still needs to pass.

Beyond the inheritance fix, the government has also broadened the definition of a "new" home for the purposes of retaining negative gearing access. Under the draft, a property sold within 24 months of its first occupancy certificate would still qualify as new, giving developers and investors a longer window to on-sell without the next buyer immediately losing access to the tax break. The aim is to prevent the reforms from choking off investment in new housing supply at a time when Australia's development pipeline is already under pressure.

The draft also preserves negative gearing for established properties used as NDIS specialist disability accommodation, affordable housing delivered through eligible community housing providers, public housing, and qualifying build-to-rent developments. These carve-outs reflect the government's intent to avoid discouraging investment in the types of housing most needed.

What the Capital Gains Tax Changes Mean for Investors

The draft package also addresses a practical problem for property owners ahead of the broader capital gains tax changes announced in the budget, which replace the long-standing 50% CGT discount with an indexed model tied to inflation.

For owners of property and other hard-to-value assets, commissioning a formal valuation to apportion gains between the old and new systems would be expensive and time-consuming. The draft provides a formula-based alternative, allowing owners to calculate the split without requiring a formal appraisal. This is a meaningful concession for landlords holding properties bought before the May 2025 cut-off.

Treasurer Jim Chalmers said the draft changes were designed to ensure Labor's reforms "appropriately apply to a range of specific taxpayer circumstances and structures," adding that further tranches of legislation were being finalised to "deliver tax cuts for millions of Australians, a fair go for first home buyers, and a fairer tax system."

For investors navigating this shifting landscape, the changes reinforce why it pays to understand precisely which properties remain grandfathered and how any future sale, inheritance, or settlement might be treated. If you are considering whether to hold, sell, or restructure your investment portfolio, it is worth reviewing your position in light of the new rules. Compare how investor home loans currently stack up, and use the repayment calculator to model how different loan structures affect your cash flow once the tax changes take effect.

The consultation period closes 21 August. Investors with complex ownership structures should review the draft and, where appropriate, provide feedback before the legislation is finalised.