Last updated October 2026
Granny flat negative gearing in Victoria generally means that when the costs of renting out your granny flat are higher than the rent it earns, the loss may reduce the tax you pay on your other income. Whether it applies depends on how the granny flat is used, the rent charged and your tax position. This guide explains the general rules before you build.
This guide is general information only and is not tax, legal or financial advice. Speak with a registered tax agent and a licensed finance professional about your situation.
Key takeaways
- Negative gearing generally applies when rental deductions are higher than rental income.
- The granny flat needs to be rented, or genuinely available for rent, on commercial terms.
- Costs shared with your home are usually apportioned.
- New law changes negative gearing for residential property from 1 July 2027.
- Renting part of your property can affect capital gains tax on your home.
What is granny flat negative gearing?
Negative gearing is a common name for a rental loss. On its page about how to claim rental expenses, the ATO explains that you can generally claim rental expenses against your rental and other income. If your other income is not enough to absorb the loss, you can carry it forward to the next income year.
For a granny flat, rental expenses may include:
- interest on the loan used to build it
- the rental share of council rates, water charges and insurance
- property agent fees and advertising for tenants
- repairs and maintenance
- capital works and depreciation on the build
Our guide to granny flat tax deductions explains each one.
When granny flat negative gearing may not apply
Granny flat negative gearing relies on the flat earning income. In general:
- Rented at market rent: rental income is declared and related expenses can generally be claimed.
- Rented to family or friends below market rent: this is treated as mixed use, and the ATO accepts limiting deductions to the rent received. That usually means no rental loss.
- Used rent free: generally no rental income and no rental deductions.
The ATO also expects the property to be genuinely available for rent, which means advertised or managed as a rental on commercial terms.
Granny flat negative gearing in Victoria: the 2027 changes
The ATO’s summary of the negative gearing and capital gains tax reforms says these measures are now law. In general terms:
- From 1 July 2027, negative gearing for residential property investments is limited to new builds.
- Properties held at 7:30pm AEST on 12 May 2026 are exempt from the negative gearing changes.
- Changes to capital gains tax apply to gains that accrue after 1 July 2027.
The ATO summary does not mention granny flats or define a new build. If you are adding a granny flat to a home you already own, ask your tax agent how granny flat negative gearing works for you under these changes.
Apportioning costs on a shared block
In Victoria, a granny flat is a small second dwelling of up to 80m² on the same lot as an existing home. It cannot be subdivided or sold separately, so many costs cover the whole block. The ATO expects shared costs, such as rates and insurance, to be apportioned. When part of a property is rented, it describes an area-based method using the tenant’s floor area and half of any shared areas. From 15 October 2026, the maximum size of a small second dwelling increased from 60m² to 80m² under Amendment VC306. Read our guide to the 80m2 granny flat rules in Victoria (link to https://innovistagroup.com.au/80m2-granny-flat-victoria/).
If one loan funds both the build and private spending, the interest also needs to be split. See how to finance a granny flat build for funding options.
Capital gains tax and land tax
Renting part of your property can mean you are entitled to a partial main residence exemption from capital gains tax, rather than a full one, when you sell. Read what happens to your granny flat if you sell your Melbourne home.
Land tax in Victoria is a state tax administered by the State Revenue Office Victoria. Ask your tax agent whether renting a granny flat affects any land tax exemption on your property.
Depreciation and records
Depreciation is often a large part of granny flat negative gearing calculations for a new build. A quantity surveyor can prepare a schedule that splits the structure from plant and equipment. Read our guide to granny flat depreciation schedules.
Keep the build contract, invoices, loan statements, rent records and a log of vacant periods.
How this fits your build decision
We do not give tax advice, but we can help with build costs, design and timing. The standard G-Flat™ is a 60m², two bedroom turnkey build from $195,000 (Affordable Lite) to $265,000 (Luxe), and takes approximately 5 months end to end.
Prices are a guide for a standard 60m², two bedroom G-Flat™ and depend on your site. Sites 70km or more from the Melbourne CBD attract a 12.5% regional surcharge, sites with no driveway or tight backyard access attract a $7,000 surcharge, and sloping or elevated sites can affect the final price. A free site assessment confirms the price for your block.
Rents vary by suburb, finish and demand. A local property manager can give you a rental appraisal. Our guides on how to legally rent out a granny flat in Victoria, granny flat pricing in Victoria and the granny flat investment property guide cover the rest. If accessibility matters too, see granny flat disability design.
Frequently asked questions
Does every granny flat qualify for negative gearing?
No. Generally it needs to be rented, or genuinely available for rent, at market rent.
Does the 2027 change affect granny flats?
The ATO summary does not mention granny flats. Ask your tax agent how it applies to you.
Can I claim depreciation on a new granny flat?
If it is rented, the structure and fittings may generally be claimed over time.
Does a granny flat affect my main residence exemption?
It can. Renting part of your property may reduce it to a partial exemption.
Talk to us about the build
Book your free site assessment or visit our display G-Flat™.