Adding a granny flat

[Fisher]

Hi,

I plan to knock down and rebuild my house. I also plan to build a granny flat as part of the new house, just with a separate entry.

I am a bit confused how should my tax deduction look like after I do this. Is it similar to renting out a room in your house? I am planning to live in the house and rent out the granny flat.

Lets say the mortgage on the house is 700k, the construction loan is 500k. What percentage of the two loans can I tax deduct if the granny flat is 60sqm and the rest of the new house is 320sqm?

What about the depreciation? How should I structure my loans to split them into investment/none investment?


Thanks.

 

[Paul@PFI]

If I told you 100% would you believe me.
How about 50%
Or 10%....Thats the sort of reply you might expect here.

Its all guesswork (sorry it needs to be reasonable). Remember that taxation is based on self-assessment. You calculate the deduction. Problem is getting it wrong - Claim too little and you are disadvantaged. Claim too much and you get penalties. ATO have two years to review your claims and a rental claim with losses elevates the audit risk (a little). Showing the Commissioner replies from here wont address recklessness. I would think it may further support it ! Its not professional advice.

You know there isnt a rule. But lets break it up:

1. The loans. (and borrowing costs)
a) Old loan was for the former house and land. But the old house is gone. Arguably NONE at all relates to the acquisition of a granny flat. Its possible a small % may relate to the land under the granny flat? Its not a % of the loan based on area. Remeber the loan was for a house and land. You demo'd the house. I would argue very little if any is deductible. Esp if you ever increased loan for private uses or other things like car etc.
b) New Loan...A % of the new loan will directly relate to the construction of the granny flat (only) + common areas where there may be shared use...Ie path to clothesline etc as examples. The builder could assist to identify the apportionment. Get it in writing and keep it. Using area might not be sound. I would argue your house will be a better quality than the shed for nanna.

2. You could obtain a depn schedule for the granny flat. It might be a high cost for a low outcome? A builders estimate may suffice. 2.5% of the construction Div43 deduction is probably clearer.

3. Ownership costs. % of land area granny flat v's all land would appear a reasonable basis. eg rates, water,

4. insurance etc % of cost based on construction cost also.

Then there is the issue of rent. This is arms length ?? If its your mum and there isnt a proven arms length rent trail it may be deemed a private arrangement and ATO disallow all deductions. Just like I cant claim a deduction for the rent my kids dont pay either.

For the new loan I dont see merits in splitting it. Use a % basis instead but if you redraw etc make sure its seperate and dont claim deductions for new amnts.

 

[Fisher]

The granny flat will be the same quality as the rest of the house, because it will be part to the house with a separate entry.

The old house is very old, so I could say that after it gets demolished the land value is almost the same as the land with the house, perhaps even more (if you add the cost of demolition).

I could get the builder to write what % of the cost of construction the granny flat is.

The granny flat will have a little yard along the boundary fence and some land in front (this is a corner block, so it will have its own frontage). I understand I could calculate the % of the land relative to the whole block and claim the % of the old loan and the borrowing costs. I will still be a little positive or neutral after all the deductions though.

Most of the time I will be renting it out to regular tenants.