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