Granny flats have become quite popular in recent years as a way to generate rental income or provide extra living space for family members. Australian homeowners are increasingly finding that granny flats can provide an extra source of income, especially as property prices continue to rise.
A granny flat refers to a small dwelling on the same property as the main residence. They can be self-contained with their own kitchen, bathroom and living area, or they can be less independent, such as a bedroom with an ensuite.
Granny flats can be rented out to tenants, and serve as a good source of extra income. However, there are a few things to keep in mind when it comes to renting out a granny flat, particularly when it comes to tax implications.
Here are a few tips to help you navigate the tax implications of renting out your granny flat:
If you have an arrangement with a friend or a relative to use the granny flat without paying rent, this is considered a ‘lodger’ arrangement and there are no tax implications. In this case, you will need to enter into a granny flat arrangement with the lodger.
A granny flat arrangement is usually an agreement drawn to show that the granny flat is not being used for commercial purposes. This exempts you from CGT and you will not be required to pay Capital Gains Tax.
If you do charge rent for the use of your granny flat, this will be considered taxable income. You will need to declare this income on your tax return and you may be liable for paying tax on it.
You may also be eligible for certain tax deductions, such as the interest on your mortgage or other expenses related to the running of the granny flat such as – Council Rates, Water Rates, Repairs & Maintenance, Pest Control, Gardening & Cleaning, Depreciation, Agents commission, etc.
When renting it out, a commercial agreement needs to be drawn up and both parties will sign it. This is to ensure that there is no misunderstanding about the terms of the agreement, such as how long the tenancy will last, the amount of rent to be paid and any other conditions.
Under such an agreement, CGT needs to be paid for all capital gains made from the flat since it was constructed. However, this tax is only payable to the actual area of the granny flat and not to the entire property.
As a general rule, CGT is only payable when the property is sold. However, if you die before the sale takes place, your beneficiaries will be liable for any CGT that is owed.
For owners who have had a granny flat for at least 1 year before selling, it, you are entitled to a 50% CGT discount.
As you can see, the nature of the use of your granny flat will have implications on the taxes you pay. The way you use it will determine whether you are liable for CGT or other taxes. Be sure to seek professional advice to ensure that you are complying with all tax laws and regulations.
If you are thinking of renting out your granny flat, it’s important to be aware of the tax implications and make sure you comply with the relevant rules and regulations. Seek professional advice if you have any questions or concerns.
At Accurate Business & Accounting Services, we are happy to help you with all your business and tax needs. For homeowners who have a granny flat, we would be more than happy to help you understand your tax obligations as tax discounts. Contact us today to find out more about our services.