08 Aug Tax Implications For Building A Granny Flat
Granny Flat Tax 101: The Tax Implications for Building a Granny Flat in NSW
Granny flats are the perfect solution for Australians looking to add value to their property, make a cosy space for their parents or children, or turn their backyard into a valuable rental property. But if you are making money from your “Grannie” in NSW, you will have to pay taxes.
Granny flats are all the rage in NSW. This new backyard building boom caused searches for granny flat rentals on Flatmates.com.au to rise 84% in just one quarter!
Now that NSW has relaxed its rules on turning your backyard into your own personal property investment portal, Australians are taking full advantage of the opportunity.
But one of life’s certainties must always be taken into account: taxes.
The tax code surrounding property is more complex than actually building the flat itself, so here are the tax implications for building a granny flat in NSW.
Do I owe capital gains tax if a family member is living in my granny flat?
No. In Australia, you are entitled to a capital gains exemption on your main residence. Your exemption extends to adjacent property, including the granny flat. If the family member is living in the flat on a non-commercial basis, should the home be sold you will still qualify for the exemption.
Be Aware: If your family member is not paying rent or paying rent well below market rate, granny flat expenses are not tax deductible!
What if I am renting my granny flat?
In the case that your granny flat is a commercial property, only a partial personal place of residence (PPR) exemption will apply. This would necessitate an apportionment between your main residence and the flat. CGT would then be applicable based on how long the flat has been in existence. For example, if you’ve owned the home for 6 years but the flat was only built 3 years ago, tax does not apply for those first 3 years. You would also qualify for the 50% CGT discount since you have owned the property for more than 12 months (I.E, because the house was not purchased with the immediate intent to sell).
Income Tax Considerations
If you are building your flat with the sole intention of making a profit, then income tax will also apply. As always, rental income is income, so you must keep accurate records of how much money is coming in each month and which expenses are deductible.
Adding a granny flat to your backyard is a great way to take advantage of generous tax benefits and generate extra income! But if you are considering building a granny flat in NSW, then be aware that there are serious tax implications. Consult with professionals with experience building granny flats to know exactly what you will be liable for. Remember, each situation is unique!