Granny Flat Tax Guide Australia: Rental Income, Deductions and CGT

TL;DR: If you rent out a granny flat, the rental income is taxable at your marginal rate, but you can claim deductions for interest, insurance, repairs, depreciation, and management costs. When you sell the property, the rented granny flat portion may trigger partial CGT — even if the main house qualifies for the main residence exemption. Building a granny flat purely for family under a formal “granny flat arrangement” may qualify for a CGT exemption. Depreciation alone can return $5,000–$10,000+ per year on a new granny flat build.

Key takeaways

• Rental income from a granny flat is assessable income taxed at your marginal rate.
• You can claim deductions for interest, insurance, repairs, council rates, property management, and depreciation — apportioned to the granny flat’s share of the property.
• New granny flats qualify for Division 43 building depreciation at 2.5% per year for 40 years, plus Division 40 plant and equipment depreciation on fixtures and fittings.
• Selling a property with a rented granny flat triggers partial CGT — you lose the main residence exemption on the income-producing portion.
• Granny flat arrangements (a life-interest right for family) have a specific CGT exemption since 1 July 2021.
• Centrelink “granny flat interest” is a completely different concept from granny flat tax rules — it affects Age Pension assessments.
• Use the grannyflatcost.com calculator to estimate build costs and understand the financial picture before committing.

Income tax on granny flat rental income

If you rent out your granny flat — whether to a family member at market rates or to an unrelated tenant — the rent you receive is assessable income. You must declare it in your annual tax return.

How rental income is taxed

Rental income is added to your other income (salary, business income, dividends, etc.) and taxed at your marginal tax rate. For the 2025–26 financial year, individual tax rates are:

Taxable income	Tax rate
$0 – $18,200	0%
$18,201 – $45,000	16%
$45,001 – $135,000	30%
$135,001 – $190,000	37%
$190,001+	45%

Below-market rent to family

If you rent the granny flat to a family member at below-market rates, you can only claim deductions up to the amount of rent received — you cannot generate a rental loss. The ATO treats below-market-rate arrangements as partly private, partly income-producing.

If you charge no rent to a family member, the granny flat is a private arrangement and no deductions are available at all.

What you can claim: granny flat tax deductions

When your granny flat generates rental income, you can claim deductions for expenses directly related to that income-producing use. Most expenses need to be apportioned between the main dwelling and the granny flat based on floor area or another reasonable method.

Expense	Deductible?	Notes
Loan interest	Yes (apportioned)	Only the portion of your loan attributable to the granny flat
Insurance	Yes (apportioned)	Building and landlord insurance for the granny flat
Council rates	Yes (apportioned)	Based on floor area ratio
Water rates	Yes (apportioned)	Based on usage or floor area
Repairs and maintenance	Yes	Must be repairs (restoring), not improvements (enhancing)
Property management fees	Yes	If you use a property manager
Advertising for tenants	Yes	Cost of listing the granny flat for rent
Legal expenses	Yes	Lease preparation, eviction proceedings
Pest control	Yes	For the granny flat specifically
Cleaning	Yes	Between tenancies
Gardening/lawn mowing	Yes (apportioned)	If the granny flat has dedicated outdoor area
Stationery and phone	Yes	Calls and correspondence related to the rental
Travel to inspect	Limited	Only if you have multiple rental properties (not just your backyard granny flat)
Depreciation	Yes	Building (Div 43) and fixtures (Div 40) — see below
Quantity surveyor fee	Yes	Cost of obtaining a depreciation schedule

How apportionment works

The ATO expects a reasonable basis to apportion shared expenses between your main residence and the rented granny flat. The most common method is floor area ratio.

Example: Your main house is 180sqm and your granny flat is 60sqm. Total floor area = 240sqm. The granny flat is 25% (60/240). You can claim 25% of shared expenses like council rates, insurance, and loan interest.

If the granny flat has its own separate insurance policy or dedicated expenses, claim those in full without apportioning.

Depreciation: your biggest tax benefit

Depreciation is often the largest tax deduction available for granny flat owners, especially in the first few years after construction.

Division 43: capital works (building structure)

The structural components of your granny flat — walls, roof, foundations, floors, plumbing, permanent fixtures — are depreciated at 2.5% per year for 40 years under Division 43.

Example: A granny flat with $150,000 in construction costs generates $3,750 per year in Division 43 deductions for 40 years.

Important conditions: the granny flat must have been built after 18 July 1985 (virtually all granny flats qualify); you need a depreciation schedule from a qualified quantity surveyor to claim Division 43; and the deduction only applies while the property is used for income-producing purposes.

Division 40: plant and equipment (fixtures and fittings)

Removable or mechanical items inside the granny flat are depreciated under Division 40 at varying rates based on their effective life:

Item	Effective life	Annual deduction rate (diminishing value)
Carpet/floor coverings	8–10 years	25% (DV)
Air conditioner (split system)	10 years	20% (DV)
Oven/cooktop	12 years	16.67% (DV)
Hot water system	12 years	16.67% (DV)
Dishwasher	10 years	20% (DV)
Blinds and curtains	10 years	20% (DV)
Smoke alarms	10 years	20% (DV)
Clothes line	10 years	20% (DV)
Fencing (dedicated)	30 years	6.67% (DV)

Total first-year deductions

Granny flats tend to attract high depreciation relative to their size because they pack the same appliances and fixtures as a full house into a smaller space.

Example: A $150,000 granny flat with $15,000 in plant and equipment could generate $7,000–$10,000 in deductions in the first year, combining Division 43 and Division 40.

The 2017 second-hand rule

Since 1 July 2017, if you purchase a property that already has a granny flat, you cannot claim Division 40 depreciation on the existing plant and equipment installed by the previous owner. You can still claim Division 40 on any new items you purchase and install yourself, and Division 43 (building structure) deductions are not affected — you can still claim 2.5% on the construction cost regardless of when you bought the property.

This rule does not affect you if you built the granny flat yourself — all Division 40 and Division 43 deductions are available.

Getting a depreciation schedule

A depreciation schedule must be prepared by a qualified quantity surveyor. Expect to pay $600–$800 for a granny flat depreciation report. The cost is tax-deductible, and given first-year deductions often exceed $5,000, the report typically pays for itself many times over.

Capital gains tax (CGT) when selling

This is where granny flat tax rules get complicated. If you sell your property and the granny flat has been rented out, you may face partial CGT even though your main residence is normally CGT-exempt.

The main residence exemption

Your primary home is generally exempt from CGT when sold. However, this exemption only covers the portion of the property used exclusively as your main residence. When part of the property generates rental income, that portion loses the main residence exemption for the period it was rented.

How partial CGT is calculated

The ATO requires you to apportion the capital gain between private and income-producing use, considering the floor area ratio (what percentage of the total property does the granny flat represent?) and the time ratio (for what proportion of your ownership period was the granny flat rented?).

Example:

• You owned the property for 10 years
• The granny flat is 20% of the total floor area
• The granny flat was rented for 5 of those 10 years (50% of ownership)
• Capital gain on sale: $200,000
• Taxable portion: $200,000 x 20% x 50% = $20,000
• After 50% CGT discount (owned more than 12 months): $10,000 added to your taxable income

Strategies to minimise CGT

• Keep detailed records of when the granny flat was income-producing vs vacant vs privately used
• Claim all construction costs as part of your cost base (reduces the capital gain)
• Use the 50% CGT discount by holding the property for more than 12 months
• Time the sale to a financial year when your other income is lower

CGT exemption for granny flat arrangements (family)

Since 1 July 2021, the ATO provides a specific CGT exemption for formal “granny flat arrangements.” This is separate from the general CGT rules above.

What qualifies

A granny flat arrangement is a written agreement giving a person the right to occupy a property (or part of it) for life. To qualify for the CGT exemption: the arrangement must be in writing and legally binding; at least one party must hold an “eligible granny flat interest”; the arrangement must not be commercial (no market-rate rent); and the person with the granny flat interest must have reached pension age or require assistance with daily activities due to disability.

What is exempt

When a qualifying granny flat arrangement is created, varied, or terminated, no CGT event arises. Parents giving money to a child to build a granny flat on the child’s property — no CGT. Transferring partial ownership in exchange for a life-interest — no CGT. Terminating the arrangement when the parent moves to aged care — no CGT.

What is not exempt

If the occupant pays market-rate rent, the arrangement is commercial and CGT applies normally. If the property is later sold, standard CGT rules apply to the sale itself. The exemption only covers the creation, variation, or termination of the arrangement, not other CGT events.

Land tax implications

Land tax treatment varies by state but follows a general principle. Your principal place of residence (PPOR) is generally exempt from land tax across all states, and this exemption continues even if you rent out the granny flat. The PPOR exemption is not lost simply because part of the property generates income.

However, if you rent out both the main house and the granny flat (because you’ve moved elsewhere), the entire property loses the PPOR exemption and becomes subject to land tax.

Each state has its own land tax rates and thresholds. The main point is that renting out a granny flat on your PPOR does not typically create a separate land tax liability.

Stamp duty considerations

Stamp duty is a one-off state tax paid when purchasing property. It doesn’t specifically apply to building a granny flat on your existing land.

Stamp duty does become relevant if you purchase a property that already has a granny flat (stamp duty is calculated on the full purchase price, which may be higher due to the granny flat’s presence), or if you subdivide and sell the granny flat separately where permitted (stamp duty applies to the new title transfer). Building a granny flat on your own land does not trigger stamp duty.

GST on granny flat construction

For most homeowners building a granny flat, GST is already included in the quoted construction price. You don’t need an ABN or GST registration to build a granny flat for personal use or rental.

GST becomes relevant in specific scenarios: if you build a granny flat, subdivide the property, and sell the granny flat within 5 years, the sale may be treated as a sale of “new residential premises” subject to GST; or if you are carrying on an enterprise of property development.

If GST applies, you may be able to use the margin scheme to reduce the GST payable on the sale. This is a complex area — get professional advice if you’re considering building a granny flat with the intention of selling it separately.

New residential premises are generally not considered “new” after they have been rented continuously for 5 or more years. After that point, the sale is typically treated as input-taxed (no GST).

Centrelink “granny flat interest” — a different concept

This is a common source of confusion. The Centrelink concept of a “granny flat interest” has nothing to do with granny flat construction tax rules. It is a Social Security term used when an older person transfers money or assets in exchange for a lifetime right to live in a property they do not own.

How it works

If a parent gives $200,000 to their child to fund construction of a granny flat (or to live in the child’s home), Centrelink assesses whether the amount paid was “reasonable” for lifetime accommodation.

If the amount paid is reasonable: no impact on Age Pension — the transferred amount is not counted as an asset or deemed. If the amount paid exceeds reasonable value: the excess is treated as a gift (deprivation), which may reduce Age Pension payments for up to 5 years.

The reasonableness test

Centrelink uses an actuarial formula based on the person’s age at next birthday and the maximum partnered pension rate at the time. Younger retirees can “reasonably” pay more because they have more years of accommodation ahead.

Gifting limits

Outside a granny flat interest arrangement, Centrelink’s standard gifting limit is $10,000 per year or $30,000 over 5 financial years. Amounts above this are treated as deprivation and may reduce pension entitlements.

Aged care trap

If a person enters a granny flat arrangement and then moves to residential aged care within 5 years, Centrelink may apply deprivation rules. The person becomes a non-homeowner for pension purposes, and the previously paid entry contribution may be reassessed.

Get professional financial advice before entering a granny flat arrangement involving asset transfers. Contact Services Australia’s free Financial Information Service on 132 300 for guidance.

Record keeping requirements

The ATO requires you to keep records for 5 years after you lodge the tax return that includes the relevant income or deductions. For CGT purposes, keep records for the entire period of ownership plus 5 years after sale.

Records you need to keep:

• Rental income: Bank statements showing all rent received, lease agreements
• Expenses: Receipts for all deductible expenses (repairs, insurance, rates, etc.)
• Loan records: Statements showing interest paid, loan purpose documentation
• Construction costs: Builder invoices, contract documents, variation orders — these form your CGT cost base
• Depreciation schedule: The quantity surveyor’s report
• Dates of use: When the granny flat was first rented, periods of vacancy, any private use
• Apportionment basis: Documentation showing how you calculated the floor area ratio or other apportionment method
• Granny flat arrangement: If applicable, the written agreement and evidence of payments

Practical tax planning tips

1. Get a depreciation schedule immediately after construction — it pays for itself in the first year
2. Keep a log of when the granny flat is rented vs vacant vs privately used — this affects CGT calculations at sale
3. Separate your loan if possible — a distinct loan or split for the granny flat construction makes interest deduction calculations cleaner
4. Distinguish repairs from improvements — repairs are immediately deductible; improvements must be depreciated
5. Prepay expenses before 30 June where the period is 12 months or less for an immediate deduction
6. Understand your CGT exposure before selling — the partial loss of main residence exemption can be a surprise
7. Get professional advice — granny flat tax situations involve multiple interacting rules; a tax accountant familiar with rental properties is worth the investment

Estimate your build costs first

Before diving into the tax implications, you need to know what your granny flat will cost to build. The construction cost directly affects your depreciation deductions, CGT cost base, and overall return on investment.

Use the grannyflatcost.com calculator to estimate your total build cost including construction, site preparation, connections, council fees, and professional fees. This gives you the numbers you need to discuss tax planning with your accountant.

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This guide provides general information only and is not tax advice. Tax rules are complex and individual circumstances vary. Always consult a registered tax agent or accountant for advice specific to your situation. Information is current as of April 2026 based on ATO guidance.