For many years granny flats have been an increasingly popular way to invest in property. Granny flats can boost a property’s value substantially and increase rental yields.
Granny flats (also known as secondary dwellings) are self-contained units that have a kitchen or kitchenette, bathroom, bedrooms, a laundry and living area. They’re popular for older family who require ongoing support, as Airbnb’s (more so if the location is in a tourist area), and for people simply wanting to boost their cash flow.
Some people are even moving into their granny flat and renting out their main home to maximise earning potential.
In this article we explore the benefits of granny flats, each state’s regulations and how depreciation deductions can maximise an investment return.
Tax benefits of a granny flat
There are many benefits to granny flats including earning a rental income, quick returns, access to tax benefits, growth in property value, and space for family growth.
The cost of constructing a granny flat is cheaper and can yield quicker returns than alternative residential investment properties such as a house or an apartment.
The price of constructing a granny flat can be anywhere from $80 000 up to $300 000 plus and construction is usually scheduled between twelve to fourteen weeks from start to final handover.
Prices depend on size, fixtures and fittings, the land it’s built on (for example if the land is on a slope construction may cost more) and existing services (if the granny flat is further away from your power and sewerage system it may cost more to connect them). This doesn’t include council or application fees. Some councils require fees and contributions be paid before building which go toward the additional services and infrastructure required as a result of a development.
Because a granny flat is income producing there are a variety of tax benefits available including depreciation] and claiming costs such as rates, insurance, interest rates, repairs and maintenance.
A typical granny flat can produce a rental income of anywhere from $250 -$500 a week depending on location, size and level of finish. Renting out a granny flat doesn’t only improve cash flow but allows owners to pay off their mortgage quicker.
It’s important to note that while there are many benefits to granny flats it doesn’t guarantee the house will grow in value and can potentially reduce the buyer pool when selling as some people don’t want a granny flat on the property. There are also possible capital gain tax implications to consider.
Each state has varying rules to how granny flats can be used, including if they are permitted to produce an income, who can occupy them and where they can be constructed on the property.
In New South Wales granny flats can be built without council approval and can be occupied by anyone. The property can’t be smaller than 450 square metres, must maintain a three-metre setback from the rear of the property, a 0.9-metre setback from the side boundaries and can’t exceed a maximum internal space of sixty square metres. They can’t exceed the maximum building height of 8.3 metres, must maintain a three-metre distance from any existing tress over four metres tall, can’t be built over an easement and the property must have residential zoning.
In the Australian Capital Territory (ACT) granny flats can be built and occupied by anyone with council approval. The property must be at least 500 square metres, the granny flat can’t be smaller than forty square metres and no larger than ninety square metres, in a residential zone, compliant with the total plot ration for the block and compliant with the Australian Standard AS 4299 Adaptable Housing Class (Class C). They must be a water sensitive urban design, compatible with exterior building materials of existing buildings in the neighborhood and compliant with setbacks. Granny flats in the ACT must have one parking space which cannot be in the ‘front zone’, clear unobstructed pedestrian access, reasonable levels of privacy and private open space for tenants.
Under emergency planning changes to help alleviate the housing crisis granny flats in Queensland can now be occupied by anyone. Previously in order to rent out a granny flat to any non immediate family member council approval was required. Without council approval granny flats can’t be larger than eighty square metres and built no further than twenty metres from the main house. Two storey granny flats can’t be taller than 9.5 metres, the rear and side walls must not exceed 7.5 metres, the highest point of the roof cannot be greater than thirty degrees on small lots and can only be built in low or medium density zones. Three storey granny flats can’t be taller than 11.5 metres, the rear and side walls must not exceed 9.5 metres and the maximum point on the top of the roof cannot be greater than thirty degrees. Granny flats must have one parking space (additional to those for the main house) and a separate entrance.
In Western Australia only one granny flat can be built on each lot, the lot size needs to be a minimum of 450 square metres (unless your local council states otherwise) and a maximum floor area of seventy square metres (some councils may state up to 100 square metres). Approval from the local council is required if the granny flat will be occupied by a person outside of the household. Once a granny flat is built the land cannot be subdivided (unless your local council states otherwise).
The regulations on granny flats in Tasmania is complex as it varies between councils. Developing land for residential purposes requires approval from your local council and granny flats must have a maximum floor size of 60 square metres or no more than thirty per cent of the total area of the main home. All building and plumbing works must comply with the standards of the National Construction Code and an Occupancy Permit is required before the granny flat is used. Granny flats in Tasmania can be occupied by anyone.
In the Northern Territory granny flats require building approval before building. They can’t exceed the maximum size of fifty square metres in urban areas such as Darwin, in rural areas your local council may allow up to eighty square metres. Granny flats can be rented to anyone but require an occupancy certificate, or a builder’s declaration before they can be occupied.
In Victoria granny flats are ‘Dependent Person’s Unit’ (DPU) and are only permitted to house one person dependent on the person/s in the main house, this means a parent, grandparent or teenage child.
Similarly in South Australia they’re called ‘Ancillary Dwellings’ and must be occupied by a member of the household who’s dependent on someone in the main house.
Granny flats can potentially exceed dimensions in each state with council approval.
Maximise investment return with depreciation
Depreciation is the natural wear and tear of a property and the assets within it over time. The Australian Taxation Office (ATO) allows owners of income-producing properties to claim this as tax deduction. Because depreciation is a non-cash deduction, money doesn’t need to be spent in order to claim it.
Depreciation can be claimed with a tax depreciation schedule. These schedules outline the maximum depreciation available including capital works (Division 43) depreciation and plant and equipment (Division 40) depreciation.
Claiming depreciation deductions on granny flats is crucial to maximise earning potential and boost cash flow. There are lucrative depreciation deductions in a granny flat, more so if it’s a newly built dwelling or owned by the original owner.
In the last twelve months BMT Tax Depreciation found clients with granny flats an average of over $6,400 in depreciation deductions in the first full financial year and nearly $30,000 over the first five years.
Even if the granny flat isn’t occupied depreciation deductions are still available as long as it’s genuinely available for rent. If it’s being used privately (by a non-paying tenant such as a family member or friend) this will cancel tax deductions including depreciation for that period and the amount claimable will be calculated by applying a pro-rata calculation, which is known as a partial year deduction.
For instance, if a granny flat is rented by a tenant for nine months, then used privately for the remainder of the year the depreciation claim will be 75% of the total depreciation available.
BMT Tax Depreciation can help you make the most from your investment property. You can take advantage of depreciation deductions at any stage in your investment property journey, ensuring your cash flow is maximised to its full potential.
To find out more about the depreciation deductions and tax benefits of granny flats call the experts on 1300 728 726 or Request a Quote.