What is TR 2026/1 and what does it change for rental property owners?

TR 2026/1, finalised by the ATO in May 2026, is the new authoritative ruling on rental property income and deductions for individual owners not in business. It replaces long-standing guidance including IT 2167. It clarifies what income must be declared, how expenses are apportioned between rental and private use, and when the 'leisure facility' rules under section 26-50 deny ownership-cost deductions entirely.

What is the transitional rule for holiday homes?

The ATO will not take compliance action to review expenses incurred before 1 July 2026 for holiday home arrangements entered into before 12 November 2025, unless there is evidence of avoidance, fraud or 'inappropriate advantage.' From 1 July 2026, the new view under PCG 2026/3 applies in full to all affected properties.

What is the new negative gearing change and when does it take effect?

From 1 July 2027, negative gearing (offsetting rental losses against other income such as salary) will be abolished for established residential properties purchased after 7:30pm on 12 May 2026. Negative gearing is retained in full for new residential builds regardless of purchase date. This is a Budget policy change subject to legislation.

What rental income do I have to declare in 2025–26?

All rent received, bond money you keep, booking fees, insurance payouts for lost rental income, and income from renting any part of your home, granny flat, or holiday property — including amounts received via digital platforms like Airbnb, Stayz or Booking.com. The ATO cross-checks this against rental bond, property manager and platform data.

Evidence-backed. Sourced from ATO Taxation Ruling TR 2026/1, PCG 2026/2, PCG 2026/3, CPA Australia, Pitcher Partners, Bentleys, SW Accountants and the 2026–27 Federal Budget. General information only — not financial or tax advice. Your specific deduction entitlements depend on your individual property arrangements and circumstances. Consult a registered tax agent before lodging. Last updated: June 2026.

⚡ Key Takeaways

In May 2026, the ATO finalised three major documents replacing decades of rental property guidance: TR 2026/1 (income and deductions for individuals not in business), PCG 2026/2 (apportionment compliance approach), and PCG 2026/3 (section 26-50 and holiday homes). These are now the definitive ATO position on rental property deductions. ^[1][2][3]
The biggest change is the “leisure facility” concept. Under section 26-50 ITAA 1997, a holiday home used mainly for private recreation can have all ownership costs denied in full — interest, council rates, land tax, insurance, maintenance and depreciation. Only expenses directly linked to actual rental stays (advertising, platform commissions, cleaning for guests) remain deductible. ^[4][5][6]
Transitional relief applies: the ATO will not take compliance action on expenses incurred before 1 July 2026 for holiday home arrangements entered into before 12 November 2025, unless there is evidence of avoidance, fraud or “inappropriate advantage.” From 1 July 2026, the new view applies in full. ^[7][1][5]
For long-term rentals, the core law is unchanged — you can still deduct expenses to the extent they relate to earning assessable rental income. But the ATO now has clearer authority to challenge “optimistic” apportionments — claiming full-year interest when the property was only available to rent for part of the year, or when you personally occupied it. ^[4][1][3]
A separate Budget change: from 1 July 2027, negative gearing will be abolished for established residential properties purchased after 7:30pm on 12 May 2026. Negative gearing is retained in full for new builds. This is a policy change, not an ATO ruling — but it fundamentally alters the tax economics of future investment property purchases. ^[11][12]

New ATO Rules for Rental Property Owners — What Just Changed (And What Didn’t)

Q: Can I still claim mortgage interest on my holiday home?

It depends on how the property is used. If the ATO classifies your holiday home as a 'leisure facility' under section 26-50 and PCG 2026/3 — meaning it is mainly used for private recreation with only incidental rental — all ownership costs including mortgage interest, council rates, land tax and insurance can be denied in full. Only direct rental expenses (advertising, platform commissions, cleaning for guests) remain deductible. From 1 July 2026 this position applies in full.

By The Fine Print editorial team | Last updated: June 2026 | 13 min read | ⚠️ Not financial advice

The ATO’s rental property guidance hadn’t been comprehensively updated in decades. In May 2026 that changed in a significant way. Three new documents — a taxation ruling and two practical compliance guidelines — replaced the old framework and, for the first time, gave clear written form to the ATO’s view on holiday homes, private-use apportionment and the “leisure facility” concept. For owners of coastal Airbnbs and mixed-use holiday properties, the consequences are material: properties used mainly for personal enjoyment can now have their entire interest, rates and maintenance deductions denied. For everyday landlords with standard long-term rentals, the core rules haven’t changed — but the ATO’s scrutiny of how deductions are apportioned has increased substantially. And then there’s the Budget: negative gearing for established properties purchased after 12 May 2026 will end from 1 July 2027. This guide explains what changed, who’s affected, and what to do about it.

📋 What’s in This Guide

What changed in May 2026 — TR 2026/1 and the new PCGs
Holiday homes and the leisure facility crackdown
Long-term rentals — what’s different now
Rental income you must declare
The negative gearing change — what it means for buyers
Three actions to take now
Frequently asked questions

What Changed in May 2026 — TR 2026/1 and the New PCGs

On 20 May 2026, the ATO finalised a package of guidance that had been in draft since November 2025. The three documents — TR 2026/1, PCG 2026/2 and PCG 2026/3 — replace long-standing rulings including IT 2167 and form the ATO’s current authoritative position on rental property tax for individual owners who are not carrying on a business. ^[1][2][3]

The three new documents:

TR 2026/1 — Income tax: rental property income and deductions for individuals who are not in business. The binding ruling on what counts as assessable rental income and how deductions are calculated.
PCG 2026/2 — Apportionment of rental property deductions: ATO compliance approach. Guidance on how the ATO will approach properties with mixed rental and private use, and what it considers a “fair and reasonable” apportionment basis.
PCG 2026/3 — Application of section 26-50 ITAA 1997 to holiday homes you also rent out: ATO compliance approach. Specifically addresses when a holiday property crosses into “leisure facility” territory and what the deduction consequences are.

The finalised guidance generally confirmed the substance of Draft TR 2025/D1 (released 12 November 2025), while adding an important transitional compliance approach in response to submissions from professional bodies including CPA Australia, which had warned in early 2026 that the strict section 26-50 position could unfairly deny deductions even for properties that were genuine income-producing assets used below market rate for family or off-peak periods. ^[3][13][2]

Holiday Homes and the Leisure Facility Crackdown

This is the most significant practical change for a large group of Australian property owners. If you own a coastal house, ski chalet, or any property that you and your family primarily use for holidays and only occasionally rent out, the new guidance has materially changed your deduction position from 1 July 2026. ^[4][5][6]Under section 26-50 of the ITAA 1997, expenses relating to “leisure facilities” can be denied. PCG 2026/3 crystallises the ATO’s view that a property predominantly used for private recreation — even one that generates some rental income through platforms like Airbnb — qualifies as a leisure facility. When that classification applies: ^[4][5][6]

⚠️ If your property is classified as a “leisure facility”:

DENIED in full: mortgage interest, council rates, land tax, insurance, general maintenance, depreciation on the building and assets
Still deductible: expenses directly linked to actual rental stays — advertising fees, platform commissions (Airbnb’s take), cleaning costs for guest stays
No apportionment is available for ownership costs — even for periods when the property was advertised or rented out. The denial is total, not proportionate.

CPA Australia summarised the concept clearly: where a property is mostly a holiday home rather than a rental, section 26-50 is applied to deny interest, rates, land tax and maintenance deductions entirely. Updated 2026 FAQs from advisers at Pitcher Partners and Empower Wealth confirm that “no apportionment is available for ownership costs” in this scenario. ^[4][5][6]The practical consequence — as Bentleys and PPT both note — is that a coastal property you thought was generating useful tax deductions may now produce none at all on the ownership-cost side. A $1.2 million property with a $900,000 mortgage could have $54,000 per year in interest alone that is now entirely non-deductible if the leisure facility classification applies. That turns what many owners structured as a tax-efficient investment into a genuine after-tax cash drain. ^[7][8][5]

The “mates rates” and family arrangement trap

PCG 2026/3 also raises the stakes for arrangements that look commercially motivated but aren’t. Renting to relatives or friends at below-market rates, blocking peak periods (school holidays, long weekends) for personal use while claiming full-year holding costs, or advertising at unrealistic prices to reduce bookings can all be taken as evidence that the property is not genuinely income-focused. Under section 26-50, that conclusion can mean no ownership deductions at all — not just a proportionate reduction for the private-use periods. ^[5][3][4]

Long-Term Rentals — What’s Different Now

For landlords with standard long-term residential rentals, the core legal position is unchanged: you can deduct expenses to the extent they are incurred in earning assessable rental income. TR 2026/1 doesn’t alter that fundamental principle. What changes is the ATO’s expressed authority and willingness to challenge apportionments that are not “fair and reasonable.” ^[4][1][3]PCG 2026/2 sets out what the ATO considers appropriate apportionment methods and signals the categories of “optimistic” claims it will scrutinise. The examples given: claiming full-year mortgage interest when the property was vacant or only available for rent for part of the year; claiming holding costs for periods you personally stayed in the property; and claiming large repair and maintenance deductions that are, on the facts, capital improvements (which must be depreciated over 40 years at 2.5% per year, not immediately deducted). ^[4][1][3][9]

💡 Data-matching backdrop: The new guidance sits alongside existing ATO data-matching programs collecting rental bond lodgements, property-manager data and short-stay platform records through 2025–26. The ATO’s updated rental income guidance (May 2026) explicitly states that owners must declare all rent received, bond money kept, booking fees, insurance payouts for lost rent, and income from sharing a room, granny flat or holiday property including via digital platforms. Omissions or understatements in any of these categories are cross-checked against that data automatically. ^[9][10]

Rental Income You Must Declare

TR 2026/1 and the ATO’s updated web guidance confirm that the following are all assessable income — they must appear in your tax return: ^[9][1]

Rent received (including advance rent)
Bond money you keep (where a tenant forfeits all or part of their bond)
Booking fees received directly from short-stay guests
Insurance payouts for lost rental income
Income from renting out a granny flat, a room, or any part of your home
All amounts received via digital platforms — Airbnb, Stayz, Booking.com, Gumtree Rentals, Facebook Marketplace accommodation listings

The Negative Gearing Change — What It Means for Buyers

Separate from the ATO rulings — and a Budget policy change, not an ATO administrative decision — the 2026–27 Federal Budget confirmed that negative gearing for established residential properties purchased after 7:30pm on 12 May 2026 will be abolished from 1 July 2027. Negative gearing is retained in full for new residential builds. ^[11][12]What this means in practice: if you buy an established apartment or house after the Budget cut-off date and your rental income is less than your holding costs (a negatively geared property), you will not be able to offset that net rental loss against your salary income from 1 July 2027. The loss will be “quarantined” — carried forward to offset future rental profits or capital gains on the property. For highly geared properties where the main appeal was the annual tax loss offsetting salary, this fundamentally changes the after-tax return calculation. Properties that are positively geared (income exceeds costs) are unaffected. ^[11][12][14]

⚠️ Important note on timing: The negative gearing change uses the purchase cut-off of 7:30pm, 12 May 2026 (Budget night). Properties under contract before that time are not affected. New builds retain full negative gearing regardless of purchase date. This is a policy change still subject to legislation — consult a tax adviser before making any purchase decision based on this change. ^[11][12]

✅ Three Actions to Take Now

Action 1: Run a “leisure facility” risk check on any holiday or mixed-use property

Ask honestly: Is this property mainly used for my family’s holidays and recreation, or is income genuinely the primary purpose? The key indicators that create risk: you block peak periods (school holidays, long weekends, summer) for your own use; you accept bookings at below-market rates; you list the property at unrealistically high prices that ensure few bookings; or your personal/family use nights significantly outnumber rental nights. If one or more of those apply, speak to a registered tax agent before 1 July 2026 about your exposure under PCG 2026/3. Options include changing how you use and advertise the property (increasing genuine income-focused availability at market rates), or accepting that ownership-cost deductions will no longer be available and adjusting your financial model accordingly. ^[5][3][4]

Action 2: Rebuild your deduction file and apportionment logic before lodging

For your 2025–26 return, gather the following for each rental property: loan statements including any redraws (redraws for private purposes are not deductible — only the interest on the income-producing portion is); property agent statements; Airbnb/Stayz platform reports; council rates notices; land tax assessments; insurance premiums; and invoices for repairs and major work. Then use TR 2026/1 and PCG 2026/2 as a checklist to apportion expenses on a “fair and reasonable basis” between rental periods, periods when the property was genuinely available at market rates, and private use periods. Claiming the full year by default — without removing personal use periods and vacant periods where you didn’t genuinely market the property — is the category of apportionment the ATO has explicitly flagged for review. ^{[9][10][3][1]}

Action 3: Factor the 2027 negative gearing rules into any upcoming purchase decision

If you are considering buying an investment property and were planning to use negative gearing as part of the return calculation, the cut-off date of 7:30pm on 12 May 2026 is already past. Any established residential property you purchase now will be subject to the quarantined-loss rules from 1 July 2027. Run the numbers on the investment assuming you cannot offset rental losses against salary income — if the property still makes sense on that basis, proceed. If the after-tax return only worked because of the annual income offset, consider whether a new build (which retains full negative gearing) or a lower-gearing approach is more appropriate given the post-2027 rules. Talk to both a tax adviser and a financial adviser before making a decision of this scale. ^[12][11][14]

❓ Frequently Asked Questions

What is TR 2026/1?

The ATO’s new binding ruling on rental property income and deductions for individual owners, finalised May 2026. Replaces IT 2167 and earlier guidance. ^[1][2][3]

Can I still claim mortgage interest on my holiday home?

Only if the property is genuinely income-focused. If it’s mainly used for personal holidays, the ATO can deny all ownership costs under s.26-50 — including interest, rates, insurance and depreciation. ^[4][5][6]

What is the transitional rule?

No compliance action on pre-1 July 2026 expenses for arrangements pre-dating 12 November 2025, unless avoidance is involved. From 1 July 2026, new rules apply in full. ^[7][1][5]

What changed for negative gearing?

From 1 July 2027, established properties bought after 7:30pm 12 May 2026 lose negative gearing. New builds retain it. Subject to legislation. ^[11][12]

What rental income must I declare?

All rent, kept bonds, booking fees, lost-rent insurance payouts, and any income from granny flats, rooms or holiday properties — including all digital platform income. ^[9][1]

⚖️ The Fine Print Verdict

The May 2026 guidance package is the most significant shift in rental property tax rules in a generation. For holiday home owners it is a genuine structural change — not a tightening at the margins but potentially a complete elimination of ownership-cost deductions for properties the ATO classifies as leisure facilities. The transitional relief to 1 July 2026 provides some breathing room but that window has now closed. For long-term landlords, the core law is unchanged but the ATO’s appetite to audit optimistic apportionments has increased, backed by data-matching that cross-references your return against property manager, rental bond and platform data. And the Budget’s negative gearing change — while not an ATO matter — reshapes the economic case for buying established investment properties at high leverage from this point forward. The combined effect is that property investment tax strategy requires a fundamental review. If you own rental property and haven’t spoken to a tax adviser since May 2026, that conversation is overdue.

👉 Run a leisure facility risk check on your holiday home. Rebuild your apportionment file. And if you’re buying property, model the return without negative gearing — because from 1 July 2027, for established homes, that’s the reality.

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📚 Sources & References

ATO, “2026 completed issues — public advice and guidance,” ato.gov.au/about-ato/ato-advice-and-guidance/advice-under-development-program/public-advice-and-guidance-completed-issues/2026-completed-issues
KPMG, “News in brief — 20 May 2026,” contentplus.kpmg.com.au
SW Accountants, “Rental properties and holiday homes — ATO’s new draft ruling,” sw-au.com/insights/article/rental-properties-and-holiday-homes-atos-new-draft-ruling/
CPA Australia, “The ATO has holiday homeowners in its sights,” cpaaustralia.com.au/public-practice/inpractice/taxation/ato-has-holiday-homeowners-in-sights
Pitcher Partners, “FAQ — what the ATO changes mean for holiday homeowners,” pitcher.com.au/insights/faq-what-the-ato-changes-mean-for-holiday-homeowners/
Empower Wealth, “ATO changes holiday homes,” empowerwealth.com.au/blog/ato-changes-holiday-homes/
PPT, “ATO holiday home changes,” ppt.com.au/ato-holiday-home-changes/
Bentleys, “ATO releases new view on tax treatment of holiday homes,” bentleys.com.au/resources/ato-releases-new-view-on-tax-treatment-of-holiday-homes/
ATO, “Rental income you must declare,” ato.gov.au/individuals-and-families/investments-and-assets/property-and-land/residential-rental-properties/rental-income-you-must-declare
Newsub Medianet, “ATO targets property investors — are your records audit-proof?” (February 2025), newshub.medianet.com.au/2025/02/ato-targets-property-investors-are-your-records-audit-proof/89584/
Budget 2026–27, “Tax reform,” budget.gov.au/content/04-tax-reform.htm
William Buck, “Federal Budget 2026 — negative gearing,” williambuck.com/tools/federal-budget-2026/negative-gearing/
CPA Australia submission on Draft TR 2025/D1 (January 2026), cpaaustralia.com.au/-/media/project/cpa/corporate/documents/policy-and-advocacy/consultations-and-submissions/taxation/2026/unsigned-tr-2025-d1-rental-properties-cpa-australia-submission—30-january-2026.pdf
Latitude Accountants, “Federal Budget 2026 tax changes Australia,” latitudeaccountants.com.au/federal-budget-2026-tax-changes-australia/

This article is general information only and does not constitute financial or tax advice. Rental property rules are based on ATO guidance current as at June 2026. Negative gearing changes are subject to legislation. Your specific deduction entitlements depend on your individual circumstances. Consult a registered tax agent and financial adviser before lodging or making investment decisions. The Fine Print 🇦🇺 is not affiliated with the ATO or any firm mentioned.

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