The humble granny flat has transformed from a way to house relatives close by into an investment opportunity.
Whilst there are some hidden costs of granny flats such as building regulations, there are also many benefits to adding a granny flat to your investment property. But the main question every Perth property investor wants to know before they invest is – what tax applies to granny flats?
The hidden costs of granny flats
If you have recently purchased a Perth rental property with a large backyard or land space and are considering building a granny flat, there may be some hidden costs associated with this addition that you may not be aware of. Besides council taxes and the construction costs, you will also need to consider the cost of installation and, in some cases, moving existing services such as sewers or storm drains. Once constructed, granny flats can be subject to capital gains tax if they are rented out as they are considered an income-producing asset.
The benefits of granny flats
Whilst they can incur additional costs, there are also many benefits to granny flats. Not only could a granny flat increase your rental yield, it can also serve as a simple renovation solution to expand the floor space of a Perth investment property without making any changes to the existing structure of the property. With the addition of a granny flat, you could increase the space available in your Perth rental, opening your property up to a wider range of tenants.
Granny flat tax exemption
If you have purchased a Perth investment property with a granny flat and have been living in the property as your main residence, you may be eligible for a capital gains tax exemption. This will depend on whether you have been leasing the granny flat out as a Perth rental. If the granny flat has been used as an income generator, CGT will be applicable; however, if the property has been used to house a relative rent-free, CGT exemption will be applied. If the granny flat on your Perth investment property is accumulating rental yield annually, the CGT will be calculated at the end of each financial year and added to your total income for that year – unlike CGT that is applied upon the sale of a property, which will be applied in the year of sale.
Adding a granny flat to your investment property may be considered a capital improvement for tax purposes. As opposed to repairs and maintenance, adding a granny flat to your property will increase the value of your investment and boost its income-producing capacity, and is therefore classed as a capital improvement. Capital improvements are eligible to be claimed through tax as a capital works deduction or a depreciation in asset, so be sure to keep all construction costs well documented in preparation for your tax return.
Expert advice from Rentwest
If you are considering adding a granny flat to your Perth investment property but are unsure of how the additional structure will affect your property’s value and appeal, speak to the property experts at Rentwest. Our experienced property management team will be able to provide advice on how a granny flat could impact your return on investment and can explain your investment property tax obligations. For more information on Perth investment properties and granny flat additions, visit the Rentwest website or get in touch with team on 08 9314 9888 for tips on property management solutions.