Passive Activity Loss Rules in Australia: 2025 Guide for Investors

Australia’s property market is a national obsession, but the tax rules for investors can be anything but straightforward. As Canberra’s policymakers sharpen their pencils for the 2025 financial year, passive activity loss rules are back in the spotlight—especially for those with negatively geared investment properties. Here’s what you need to know to stay ahead of the changes, maximise your deductions, and avoid costly tax traps.

What Are Passive Activity Loss Rules?

Passive activity loss (PAL) rules are designed to limit the ability of investors to offset losses from passive activities—like rental properties or certain business interests—against other types of income, such as wages or business profits. While the term ‘passive activity’ is more commonly associated with US tax law, Australia’s tax system has its own set of restrictions that serve a similar purpose. The ATO’s focus has sharpened in 2025, especially as property tax concessions come under renewed scrutiny.

• Passive activities typically include rental properties, shares in managed funds, and interests in limited partnerships.
• Active participation (such as running a business or managing property hands-on) may allow broader loss offsetting.
• Australian investors are most affected in the realms of negative gearing and restrictions on rental property deductions.

2025 Updates: The New Landscape for Negative Gearing and Deductions

Policy debates over negative gearing have been ongoing for years, but 2025 marks a turning point. The Federal Government’s latest budget included targeted restrictions on rental loss deductions, aimed at high-income earners and multiple-property owners. The ATO has also stepped up compliance activity, using new data-matching tools to spot aggressive tax minimisation tactics.

• Deduction caps: From 1 July 2025, there’s a $10,000 annual cap on certain rental property expenses that can be claimed as deductions against salary and wage income for individuals with total incomes exceeding $250,000.
• Interest tracing rules: Investors must show clear records that interest deductions relate strictly to income-producing activities, closing popular loopholes.
• Enhanced substantiation: New ATO guidelines require digital receipts and more detailed records for property-related claims.

For example, if you own three investment properties and your total income is $300,000, you’ll only be able to claim up to $10,000 in relevant rental deductions in the 2025–26 tax year. Any losses above this threshold must be carried forward, and can only offset passive income or capital gains in future years.

Who’s Affected—and How to Respond

The 2025 passive activity loss rules mainly impact:

• High-income investors with multiple properties
• Those relying heavily on negative gearing to reduce taxable income
• Investors with complex property portfolios or joint ventures

For everyday investors, the changes mean sharper focus on recordkeeping and a possible rethink of tax strategies. Here are some practical steps:

• Review your investment structure—consider whether trusts or company ownership may offer more flexibility under the new rules.
• Prioritise high-yield properties where positive cashflow reduces reliance on tax offsets.
• Consult with a tax professional about the best way to carry forward and utilise disallowed losses in future years, especially if you expect to generate capital gains.
• Take advantage of other property-related tax concessions, such as depreciation schedules, which remain unaffected by the 2025 PAL cap.

Real-World Example: Navigating the 2025 Rules

Suppose Sarah, a Sydney-based investor earning $270,000 a year, owns two apartments in Parramatta. In 2024, she claimed $15,000 in rental property losses, offsetting her salary income. Under the 2025 rules, only $10,000 is claimable against her wages; the remaining $5,000 must be carried forward. If Sarah sells one property in 2027, she can use the carried-forward losses to offset any capital gains tax liability from the sale.

This approach rewards patient investors and penalises those who aggressively chase annual tax refunds. For many, a new era of property investment discipline has arrived.

The Bottom Line: Adapt and Prosper

Australia’s 2025 passive activity loss rules are reshaping the investment property landscape, especially for high-income earners and portfolio landlords. While negative gearing isn’t dead, it’s no longer the open slather it once was. Investors who adapt—by tightening records, reviewing structures, and focusing on sustainable returns—will be best placed to thrive in the new regime.