How quarantined property losses may offset other residential property income under Budget changes

Under the changes, losses from certain residential investment properties will become quarantined. This means they will no longer be used to offset unrelated income such as salary or wages.

However, quarantined does not necessarily mean unusable.

Depending on an investor’s circumstances, a quarantined loss from an impacted property may be used in a specific order:

This is the key strategic consideration for investors. A loss-making property may no longer be viewed only as a standalone tax outcome. Instead, investors need to consider how that loss interacts with other investment properties in their portfolio, including income-producing properties and properties that may be sold in the future.

Understanding this ordering will become increasingly important because it could affect when a loss can be used and what information an accountant requires to calculate the outcome correctly.

Kim owns three residential investment properties during the financial year:

In this scenario, Property A’s $40,000 quarantined loss is reduced by the combined net residential income from Properties B and C ($20,000 + $10,000 = $30,000).

The effect is that the income from Properties B and C is fully sheltered, with the loss applied as a single net figure rather than property by property.

After these adjustments, Kim would still have $10,000 of quarantined losses remaining.

That remaining amount may be carried forward or applied against eligible residential property income or capital gain, depending on Kim’s circumstances.

The example highlights an important point: a loss from one property may not be confined to that property alone. Instead, it may help reduce taxable income generated elsewhere in the portfolio.

In the following financial year:

Kim now has total quarantined losses of $50,000 available.

Under the ordering rules:

As a result, the capital gain is reduced from $200,000 to $160,000 before any remaining capital gains tax calculations are applied.

This example demonstrates how current-year losses, carried-forward amounts, residential property income and future property sales would all need to be considered together under this framework.

An investment portfolio is more than a collection of individual properties.

One property may generate a loss due to interest costs, repairs, depreciation and other holding costs. Another may be positively geared because it has been owned for a long time, resulting in lower debt levels and stronger rental income.

With these changes, the relationship between the properties has become increasingly important. The timing and interaction of deductions, residential property income, carried-forward losses and capital gains could affect the overall tax outcome.

This makes proactive planning essential. Investors may need to discuss questions such as these with their accountant:

For investors with multiple properties, these considerations may become a routine part of annual tax planning.

The changes place greater importance on accurately tracking property income, expenses, depreciation deductions and carried-forward losses.

Depreciation is a non-cash deduction that can contribute to a property’s taxable loss. Having an accurate tax depreciation schedule can help investors and their accountants understand how depreciation forms part of the overall property position.

A BMT Tax Depreciation Schedule provides detailed, property-specific depreciation information that can support tax return preparation, compliance and long-term record keeping.

This will be particularly valuable for investors with multiple properties, where depreciation deductions from one property could contribute to losses that interact with income or gains from another asset within the portfolio.

While the changes do not commence until 1 July 2027, investors can take steps now to ensure their records are complete and up to date. Having a clear understanding of each property’s income, expenses, depreciation deductions and potential future gains can support more informed discussions with an accountant.

For more information on how a BMT Tax Depreciation Schedule can help identify eligible depreciation deductions and support clear record keeping for each investment property, contact BMT Tax Depreciation or Request a Quote.

Disclaimer: This information is general in nature and does not consider your personal circumstances. Tax outcomes depend on individual situations and current legislation. You should seek independent advice from your accountant before making decisions based on this information.