Multiple-property investors may need a portfolio-wide view of quarantined losses

How quarantined losses may be used

The key change is not whether an impacted property can generate a loss, but where that loss can be applied.

The restrictions apply to established residential properties acquired after 7.30pm AEST on 12 May 2026. These properties can continue under the current negative gearing rules until 30 June 2027, with losses generally quarantined from the following financial year.

Properties owned or contracted before the Budget-night cut-off are grandfathered, while eligible new residential properties remain outside the restriction. A single portfolio may therefore contain properties with different tax treatment.

For investors who own only one affected residential property, quarantined losses may simply be carried forward until they can be applied under the new rules. The additional complexity arises where multiple residential investment properties produce different taxable outcomes in the same income year.

A quarantined loss may first reduce positive residential property income elsewhere in the portfolio. Any remaining amount may then be applied to reduce a relevant residential property capital gain or quarantined and carried forward.

Consider an investor with three residential properties. An impacted established property generates a $40,000 quarantined loss, while two grandfathered properties produce net residential property income of $20,000 and $10,000.

The combined $30,000 of income may absorb part of the loss, leaving $10,000 to carry forward.

The investor cannot claim the $40,000 against salary or wages, but the loss still reduces the portfolio's taxable residential property income.

Property sales may use carried-forward losses

Carried-forward losses may also become relevant when an investor sells a residential property.

Assume the investor carries forward the remaining $10,000 and incurs a further quarantined loss of $40,000 in the following year. The total quarantined amount is now $50,000.

Another property produces $10,000 of positive residential property income, reducing the balance to $40,000. If the investor then sells a residential property and makes a $200,000 capital gain, the remaining loss may reduce the gain to $160,000 before the relevant capital gains tax treatment is applied.

Current-year rental results, carried-forward losses and property sales may therefore need to be assessed together.

Accurate records will be important to support the amount of loss generated, where it was applied, and what remains available for later financial years.

Depreciation matters across the portfolio

Depreciation will continue to influence the taxable position of every investment property, not only those affected by the restrictions.

For an impacted property, eligible depreciation deductions may increase the quarantined loss available to offset residential property income or gains.

The depreciation claim for an unaffected property is just as important. The positive net income from that property must be calculated before a quarantined loss can be applied against it.

For example, a grandfathered property may produce $20,000 of net income before depreciation. If the property holds $6,000 in eligible depreciation deductions, its correct taxable income may be $14,000.

Only $14,000 of the quarantined loss would then be absorbed by that property. A larger balance may remain available to reduce income from another residential property, a relevant capital gain or income in a later year.

Missing depreciation from either property could change the amount applied at each stage and distort the investor’s portfolio-wide tax position.

A tax depreciation schedule provides property-specific information on eligible capital works and plant and equipment deductions. It can also support claim accuracy where building records are incomplete, assets require classification or deductions must be tracked across several financial years.

Records should be reviewed before 2027

Although the restrictions start on 1 July 2027, the acquisition cut-off has already passed.

Investors should retain documents that confirm contract and acquisition dates, property classifications, rental income, expenses, depreciation deductions and carried-forward losses.

This is particularly relevant for portfolios containing properties acquired, constructed or sold at different times.

For investors with multiple residential investment properties, the reforms may change when and where some property losses can be recognised. As a result, establishing the correct taxable position of each property within the portfolio will become increasingly important.

Bradley Beer is the CEO of BMT Tax Depreciation.

BMT Tax Depreciation can prepare a property-specific tax depreciation schedule to identify eligible deductions and strengthen the records supporting future claims and portfolio calculations. Request a Quote for a BMT Tax Depreciation Schedule or phone 1300 728 726 to discuss the property with a specialist.

Disclaimer: This piece is general in nature and does not constitute financial, legal or tax advice. Investors should seek advice from their accountant, financial adviser, or other qualified professional regarding their individual circumstances.