Guide to Making Your Granny Flat Tax Deductible

June 30, 2023


Smart Investors Using Granny Flats for Tax Deductions

As interest rates soar, the allure of investing in Granny Flats has surged. In New South Wales alone, thousands of Granny Flats were constructed last year. Their growing popularity can be attributed to state planning legislation aimed at enhancing housing affordability in major urban areas.

Indeed, Granny Flats present an enticing opportunity to venture into investment without straining your finances. They have the potential to augment the value of an existing property—whether it serves as your primary residence or one of your current investment holdings.

Furthermore, the rental income generated by Granny Flats bestows significant tax advantages upon property investors, encompassing substantial tax deductions like depreciation.

What Are the Advantages of Investing in Granny Flats?

Consideration of all relevant factors is crucial when exploring any property investment strategy.

  • Supplemental income generation: Constructing a Granny Flat on your existing property, whether it's your primary residence or an investment property, can provide an additional stream of rental income.
  • Risk diversification: By adding a Granny Flat to an already established investment property, you potentially gain two income sources, or at least one in case the other property remains vacant.
  • Taxable depreciation deductions: Integrating a Granny Flat into your current property increases the number of depreciation deductions you can claim through your depreciation schedule.
  • Beneficial for families: Granny Flats serve as a worthwhile family investment, enabling the generation of rental income while also serving as a future stepping stone for your children when they move out. Additionally, these flats can provide extra privacy within a family by accommodating a parent or elderly relative in need of care.

Tax Deductions for Granny Flats

The Australian Tax Office (ATO) permits property investors to claim tax deductions on their rental property expenses, as long as the property continues to generate income.

This applies to Granny Flats as well.

Leveraging these tax benefits can significantly impact whether your property is positively or negatively geared, making it essential to familiarise yourself with tax deduction regulations.

To assist you, we have compiled a comprehensive list of tax deductions available to property investors, so be sure to review it.

Among the notable deductions on the list, depreciation stands out as one of the most significant benefits to Granny Flat investors.


Depreciation: Maximising Tax Deductions for Granny Flats

Depreciation refers to a valuable non-cash tax deduction accessible to property investors throughout the lifespan of their property's structure and its assets. Each year, wear and tear gradually affect both the structure and assets of an investment building, resulting in depreciation.

The Australian Tax Office (ATO) permits two types of depreciation deductions:

1. Division 43 - Capital Works Deductions:

Capital works deductions, also known as Division 43 deductions, pertain to the depreciation of a building's structure. If a residential building was constructed after September 1987, its structure typically has a 40-year effective life, allowing a 2.5% depreciation deduction on the investment property for 40 years from the construction date.

Claimable assets under capital works deductions encompass:

  • Bricks and mortar
  • Flooring
  • Fences
  • Retaining walls
  • Bathroom fittings like baths, showers, and toilet bowls


2. Division 40 - Plant and Equipment:

"Plant and equipment" refers to removable fixtures and fittings within the building. These assets generally deteriorate at a faster rate than the building's structure, resulting in a shorter effective life. For instance, a carpet, subject to considerable wear and tear, typically has an effective life of eight years.

Potential plant and equipment assets claimable for Granny Flats include:

  • Kitchen assets like ovens and cooktops
  • Hot water systems
  • Window blinds
  • Curtains
  • Air conditioning units or ceiling fans.

Granny Flats often yield substantial depreciation benefits as you can claim depreciation not only on the Granny Flat but also on any shared areas with your home. For example, if the tenant has access to assets such as a garage, separate laundry, pool or patio, you can claim depreciation on them as well.


How Do Tax Deductions Work if Renting the Granny Flat and Occupying the Main House?

When you rent a Granny Flat but live in the main property, expenses related to the rental, including depreciation, are tax deductible. However, there are implications for capital gains tax (CGT). Typically, a house you reside in is exempt from CGT. However, capital gains made since construction of a Granny Flat may be subject to CGT.

It's not all bad. The CGT is based on the area occupied by the Granny Flat relative to the entire property. For example, if it occupies one-sixth of the property, only one-sixth of the increase in value since its construction is subject to CGT.

Plus, if the Granny Flat is not always used for rental income, the property would only be subject to CGT during the period it was used for rent and in the event of a sale after holding the property for over a year, you may be eligible for the 50% CGT discount.

Key Takeaway: Granny Flats Make Great Tax Deductions

The surge in popularity of Granny Flats as an investment opportunity is undeniable. Each year, their growing numbers can be attributed to several factors that make them an attractive option for investors. Notably, the relatively low cost of construction and the typically easier process of obtaining council approval contribute to their increasing prevalence.

One key advantage for investors is the availability of numerous depreciation deductions which can play a pivotal role in maximising returns on investment. By claiming these deductions, investors can substantially reduce their taxable income and potentially achieve a positive cash flow from their Granny Flat investment, or their whole property portfolio at an accelerated pace.

Speak to Cubitt's about your Granny Flat Investment

Our friendly team understand that building a home is a unique and personal experience. We’re ready to listen to your needs, and provide customised Granny Flats to suit your lifestyle requirements such as wheelchair ramps and wider doorframes.

Are your ageing parents reluctant to downsize? Get them excited to move with our  extensive range of 2 bedroom Granny Flats in NSW and ACT

Have a limited budget? View our fantastic range of 1 Bedroom Granny Flats in NSW and ACT

For more information, call our award-winning customer service team on 1300 721 150.

Free On-Site Assessment at Your Property

Interested in finding out how to make a positive investment from a Cubitt's Granny Flat or Home Extension? Get in touch for a no-obligation site inspection today.

If you are looking to purchase a new property and want to do a Granny Flat Suitability Check - please use this form instead.

We require your name, email and phone number to get back to you - and the more you can tell us about your build project, the more effectively our local teams can help.


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About Kate Cubitt

Kate is Managing Director of Cubitt's. She is an experienced company director, avid investor and keen to share the financial insight she's gained being a female leader in the building industry.