Granny flat tax exemption: What you need to know

The humble granny flat has evolved considerably from its origins in Victorian England when it was known as a dowager house. Here in Australia, the small self-contained unit attached to or located in the backyard of a family home originally served to house elderly relatives.

In the twenty-first century, with the passing of new legislation by state and local governments, it has evolved to provide a much wider range of services and purposes.

Granny flats have become home to teenagers looking for some privacy, to younger generations saving to purchase their first home and increasingly as an investment, providing additional income to homeowners.

It is easy to see why granny flats are such an appealing investment with CoreLogic reporting that building a granny flat could boost your property value and rental income by 30 and 27 per cent, respectively.

To add to its attraction as an investment, the Treasury recently announced a capital gains tax (CGT) exemption on Granny Flats from July 2021. Here’s everything you need to know about the new tax breaks and how to go about adding a granny flat to your property.

What you need to know about the Granny flat tax exemption

Granny flat advantages bring popularity boom

The State of NSW, in particular, is a granny flat haven, having one of the highest numbers of granny flats in the country, thanks to the granny flat-friendly NSW planning legislation. There are several other reasons for the surge in popularity of granny flats, including:

• It meets the growing demand for affordable housing for the elderly.
• It provides a good-sized home for individuals who live independently, where a large family home is unnecessary, but they don’t want to live in a flat or apartment.
• It generates additional income for homeowners who have space at their existing property to build one.
• It densifies existing communities, enabling growing populations to use existing infrastructure, saving the need to build new roads, transport and services.
• It provides a preferable alternative to aged care or nursing homes for elderly relatives which is all the more desirable during health crises like the COVID-19 pandemic.
• Many properties are on large plots, with unused space that can accommodate a granny flat.

Many communities on the Central Coast including the Newcastle, Lake Macquarie and Hunter regions, are popular with older generations looking to escape the city in their retirement. With continually rising house prices in these areas, granny flats are a popular and affordable alternative to a large family home.

Whether renting from an existing homeowner who has added a granny flat as an investment to generate additional income, or building a granny flat on their property so that they can downsize in their backyard, granny flat living has become increasingly common among seniors.

Those who downsize by moving into a granny flat on their existing property have the added benefit of renting out the main house for additional income.

A COVID-19 safe haven for grandparents

The arrival of the COVID-19 pandemic and its impact on the elderly, especially those in aged care centres and nursing homes, has seen an increase in demand for granny flats. They’re an excellent solution for families wanting to keep their older family members close at the same time as affording them some independence.

Families have become reluctant to place senior family members in aged care facilities due to the risk of communal transmission of the COVID-19 virus. In some cases, due to restricted or even cancelled visitation to nursing homes and aged care facilities, families have chosen to house and care for elderly relatives in their own home or a granny flat attached to it.

Capital gains tax exemption on granny flats

Previously, one of the downsides to building a granny flat on an existing property was that it could see the family home lose its exemption from capital gains tax if it sold.

The Treasury announced a CGT exemption on granny flats in the federal budget due to start in July 2021. The exemption will help many families provide safe accommodation for senior or disabled family members, which is incredibly beneficial in these difficult pandemic times. To benefit from the exemption, you need to have an agreement for a family member/s to reside in the granny flat as it does not apply to commercial or private rental purposes.

Commonly asked questions about granny flats and taxes

Q: Is there a granny flat tax deduction?

A: There will be depreciation benefits at tax time, including portions of land rates, borrowing costs and utilities.

Q: Does a granny flat add value to an existing property?

A: In most cases, yes. A granny flat will add up to 30% value to a property. It can depend on its size, purpose and location. Granny flats are more popular in some areas than others. If used as a rental, the potential income can increase value, but keep in mind that income may be taxed.

Q: Is there CGT on granny flats?

A: Normally, yes. Having a granny flat on your property means you will pay CGT. If used to house elderly family members, the new granny flat tax exemption will be a bonus.

Q: Can I build a granny flat in my backyard?

A: Yes, you can build a granny flat in your backyard provided your property meets council requirements. Your block must be a minimum of 450 sqm and have a width of 12 metres at the building line of the existing house.

Q: What is the maximum size allowed for a granny flat in NSW?

A: 60 sqm is the maximum size of the granny flat you can build in NSW.

Getting started

With the wide-reaching benefits of granny flats already well known and now with the CGT exemption as a bonus in applicable cases, it is the perfect time to consider building a granny flat.

Before deciding to build a granny flat, there are several things to consider:

• Compliance – Does your block comply with council specifications?
• Cost – Most granny flats range from $99,000 to $200,000 depending on your granny flat design, size, fittings and finishes.
• Purpose – Is it an investment, a home for family members, or a downsizer for yourself?
• Privacy – This may depend on the purpose: if it is to be a rental, you will probably require more privacy than if it will house a family member.
• Resale – Will you benefit from the new CGT exemption? Do properties with granny flats sell well in your area or do buyers seem to prefer single-dwelling blocks?
• Family – If your granny flat is intended to house family members, it may be worth having a formal agreement with them on terms to prevent possible misunderstandings in the future.
• Size – The maximum size allowed for a granny flat in NSW is 60 sqm. Is this enough for your plans?

The humble granny flat has come a long way since its origins. Its uses have expanded and diversified, and its popularity has increased all over Australia, especially in NSW. The recent announcement of the CGT exemptions coming into effect from July 2021 has come as welcome news to those who are eligible to benefit from it. This bonus is sure to see granny flats enjoy another surge in popularity in 2021.