The centre-right government has long wanted to give flat owners more flexibility in what they charge when the rent out their homes.
The proposal, which was voted through parliament on Wednesday with a slim margin, could ease the housing crunch by offering a financial incentive to rent out unused flats, the government argues.
Critics fear it will undermine Sweden’s cooperative model of housing.
The different changes to Sweden's housing laws proved so controversial in the last few months that the government had to build an unusual alliance on the floor of parliament.
Its MPs had to rely on the support of the minority Sweden Democrats, usually a pariah party rather than a political partner, to get a majority.
The Sweden Democrats abandoned the government, however, on one specific proposal that wanted to take away the cooperatives' right to veto a tenant who wanted to rent out his or her flat.
Usually, such permission is given only when a tenant is working or studying in a different city or country for a specified time, or if a tenant wants to give living with a partner a trial-run.
MPs were evenly split 169 to 169 when they voted on the proposal, in effect stalling it.