Granny flats and CGT


The popularity of granny flats continues to rise as more property owners warm to the idea of converting their backyards into investment opportunities. While granny flats can provide additional living space and the potential for rental income, consideration must be given to the various tax and financial implications before adding such a building to your property.

Under the main residence exemption, homeowners don’t pay capital gains tax (CGT) upon selling the home they live in. However, those who use any part of their property to produce income are generally not entitled to the full exemption. This includes arrangements such as granny flats or renting out rooms on Airbnb. Granny flats cannot be included in a separate ownership title. Instead, the cost of the granny flat is added to the price of the property and, therefore, cannot be sold separately.

CGT applies to the granny flat portion of the property and is calculated by how many years it has been in existence. For example, if you have owned the property for 10 years, but the flat was built five years ago, you do not need to pay CGT on the first five years. For granny flats on subdivided land, the CGT main residence exemption will not apply on the eventual disposal of the property, as it is only exempt when sold with the home that is your main residence.

When running a flat that is rented out at regular commercial rates, expenses incurred such as the proportion of utility bills and land rates are tax deductible. Depending on the precise circumstances, this might generate a taxable profit or it might generate a loss for the taxpayer to claim against other income. For those in the business of building and commercially letting out granny flats, any gains would be first assessed as ordinary income or profit and a partial CGT exemption would apply on any subsequent disposal of the property on the basis of income use.

Where the granny flat is occupied by relatives or adult children and no commercial rent is charged, the whole property will qualify for the CGT main residence exemption, meaning no CGT is payable. Note that payments from a family member for board or lodging are considered to be domestic arrangements and are not rental income. In these situations, you cannot claim income tax deductions.


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