Know the tax implications of Granny flat leasing Vs Granny flat arrangement!
22 August, 2022 BY Bibek Nepal, CPA

Know the tax implications of Granny flat leasing Vs Granny flat arrangement!

With an ageing population and a rise in property prices, granny flats are becoming increasingly popular amongst Australian homeowners.

A granny-flat is a small, self-contained home having a separate entrance, but not a separate title, and is built within the boundary of the main property.

A granny-flat can’t be sold separately unless the property is subdivided under a separate title.

Your family home or main residence is generally exempt from capital gains tax (CGT), however, the granny flat (which becomes a part of the overall property) may or may not be exempt.

Depending on how you use it (and who is going to use it), granny flats can have different implications when the property is sold later.

If you enter into a granny flat arrangement with eligible personal (who may be your relative or friends), CGT exemption applies which means, you don’t have to pay CGT on the capital gains made on the property.

Granny flat arrangement is a written agreement that is not commercial in nature that gives an eligible person the right to occupy a property for life.

However, if you are leasing the granny flat for rent, it would be considered a commercial arrangement and so, your property could become partially liable to CGT in the event of a sale.

Any capital gains made on the property since the time the granny flat was constructed would be subject to CGT calculated in proportion to the area of property occupied by the granny flat.

For example, if the granny flat only occupies one-fourth of your overall property, only one-fourth of the increase in value since the construction of the flat would be subject to CGT.

It could get even more complicated if the granny flat is not used to generate rental income on a full-time basis.

In this case, the property would only be subject to CGT proportionately for the period it was used for income-producing purposes.

If you’ve held the property for at least 12 months at the time of sale, you would be eligible for a 50% discount on CGT.

Get in touch with us if you have any questions or need help understanding the tax implication of Granny flat leasing Vs Granny flat arrangements.

Disclaimer: This article is provided as general information only and does not consider your specific situation, objectives, or needs. It does not represent accounting or tax advice upon which any person may act. Implementation and suitability require a detailed analysis of your specific circumstances. Before taking any action, consider your own circumstances and seek professional advice.


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