Granny flats have gained significant popularity in recent years as a means to generate rental income or provide additional living space for family members. Many Australian homeowners are discovering that these secondary dwellings can serve as an extra income source- especially in the context of rising property prices!
A granny flat typically refers to a compact residence located on the same property as the main house. They can either be fully self-contained, featuring their own kitchen, bathroom, and living area, or they can be less autonomous, like a bedroom with an attached bathroom.
These secondary units can be rented out to tenants, serving as a valuable source of supplementary income. However, there are several important factors to consider – which may have tax implications…
- If you have an agreement with a friend or relative who uses the granny flat without paying rent, this is categorised as a ‘lodger’ arrangement, and it doesn’t have any tax implications. In this scenario, you should establish a formal granny flat arrangement with the lodger. A granny flat arrangement typically signifies that the flat is not being used for commercial purposes, exempting you from Capital Gains Tax (CGT).
- Charging rent for your granny flat constitutes taxable income, which must be reported on your tax return- (and you may be liable to pay tax).
- You might be eligible for specific tax deductions, such as mortgage interest or other expenses related to maintaining the granny flat, such as council rates, water rates, repairs, pest control, gardening, cleaning, depreciation, agent commissions, and more.
- When renting out the granny flat, a formal commercial agreement should be drafted and signed by both parties to clarify the terms of the tenancy, including its duration, rent amount, and any additional conditions.
- Capital Gains Tax (CGT) is applicable on any capital gains generated by the granny flat from its construction. However, this tax applies only to the portion of your property occupied by the granny flat; (not your entire property).
- Generally, CGT is due when the property is sold. In the event of your passing before the sale, your beneficiaries will be responsible for any outstanding CGT.
- If you’ve owned the granny flat for at least one year before selling it, you may be entitled to a 50% CGT discount.
In summary, the tax implications of your granny flat depend on its usage. Whether you’re subject to CGT or other taxes hinges on how you utilise the flat. If you’re considering renting out your granny flat, it’s crucial to be aware of the associated tax considerations and adhere to relevant rules and regulations.
If you’re considering building and / or renting out a granny flat on your property; don’t hesitate to get in touch with our team to chat further.
