Granny flats, also known as secondary dwellings or accessory dwellings, are becoming increasingly popular in Australia as a way for homeowners to generate extra income or accommodate family members. However, it's crucial to understand the tax implications of setting up a granny flat, particularly Capital Gains Tax (CGT).
Capital Gains Tax is a tax on the profit made from the sale of a taxable asset, such as real estate. When a granny flat is established, it becomes a separate taxable asset, and any profit made from its sale is subject to CGT. The CGT is calculated on the difference between the cost of the asset and its sale price, less any costs incurred in making the sale.
In Australia, the cost of the granny flat asset includes the cost of construction or renovation, as well as any legal or professional fees associated with setting up the arrangement. The sale price is the amount received from the sale of the granny flat, less any selling costs.
One of the significant benefits of a granny flat arrangement in Australia is that it can help homeowners defer or reduce their CGT liabilities. This is because the cost of the granny flat can be offset against the main residence, effectively reducing the taxable gain.
It's important to note that the main residence and granny flat must be used primarily for residential purposes to qualify for the CGT main residence exemption in Australia. If the granny flat is used for income-generating purposes, such as rental, then it may be subject to CGT as a separate taxable asset.
In addition to the CGT implications, there are also other tax implications to consider when setting up a granny flat in Australia, such as income tax on any rental income received. It's essential to seek advice from a tax professional to ensure that all tax obligations are met.
It's also crucial to keep accurate records of all expenses related to the granny flat, including construction or renovation costs, legal fees, and any income received from renting the granny flat. This information will be needed to calculate the CGT liability when the granny flat is sold.
Setting up a granny flat in Australia can be a great way to generate extra income or accommodate a relative. However, it's essential to understand the tax implications, particularly CGT when building a granny flat. By keeping accurate records and seeking advice from a tax professional, homeowners can minimise their tax liabilities and make the most of their granny flat arrangement.
This blog has been prepared for the purposes of general information and guidance only. It should not be used for specific advice or used for formulating decisions under any circumstances. If you would like specific advice about your own personal circumstances, please feel free to contact us on 02 9411 5422. We can help make sure the right method is used to give you the maximum possible tax deduction associated with any of these methods.
Photo Credit: Cubitt's Granny Flats