Insights · Property and lending
Granny flats: the tax for family use and rentals
With housing so expensive, granny flats on Western Sydney blocks have become a popular way to house ageing parents or adult children, or to earn extra income. The tax treatment depends on who lives there and on what terms.
Renting it out to a tenant
If you rent a granny flat to an unrelated tenant at market rent, it’s treated like any rental property:
- The rent is assessable income and goes in your tax return.
- Deductions include a share of rates, insurance and interest (if you borrowed to build it), plus costs that relate only to the flat, such as repairs, agent fees and advertising.
- Depreciation: the construction cost of the granny flat is a capital works deduction at 2.5% a year, and new appliances, carpets and air conditioning can be depreciated as plant and equipment. A depreciation schedule is worth getting. See depreciation on new and established properties.
- Apportioning: shared costs, like rates on the whole block, need to be split on a reasonable basis, usually floor area.
- Interest: if you borrowed to build the granny flat, keep that loan separate from your home loan so the interest is clearly deductible.
The catch: your main residence exemption
Your home is normally exempt from capital gains tax. If part of the property produces rent, that part may lose the exemption for the period it’s rented, so a share of the gain on the whole property could be taxable when you sell. The share is usually worked out by floor area and time. Keep records of when the flat was rented and the costs of building it, which go into the cost base. See the main residence exemption.
Family living in the granny flat
If a parent, adult child or other relative lives there for free, or pays a contribution towards costs that’s well below market rent, it’s generally not a rental for tax purposes. You don’t declare what they pay, but you can’t claim deductions either, and your main residence exemption usually isn’t affected.
The granny flat CGT exemption
Since 1 July 2021, a specific CGT exemption applies to formal written granny flat arrangements for older Australians (Age Pension age or over) and people with a disability. Creating, varying or ending the arrangement doesn’t trigger CGT, as long as it isn’t commercial. Putting it in writing, ideally with legal advice, protects both the family and the older person.
The Age Pension
If a parent transfers assets or money to you in exchange for the right to live in the granny flat for life, Services Australia treats it as a granny flat interest. Done properly, it isn’t treated as a gift; done badly, part of it can count as a deprived asset. See Age Pension rules that catch people out.
GST
Residential rent is input taxed, so you don’t charge GST on the rent and can’t claim GST credits on building costs. If you build to sell, different rules can apply.
Land tax
In NSW, your principal place of residence is generally exempt from land tax. Renting out a granny flat on the same lot may affect that exemption depending on Revenue NSW’s conditions, so check before you rely on it [check: confirm current Revenue NSW treatment of granny flats on a principal place of residence].
Approvals
Most granny flats in NSW can be approved as complying development if they meet the size and setback rules. Your council or a certifier can confirm what applies to your block.
Plan before you build
The ownership, financing and use of a granny flat all affect the tax for years. Talk to us before you build, and Judge Lending can arrange construction finance. See personal tax returns.