Last updated October 2026
Granny flat tax deductions are generally available when you rent your granny flat to tenants, because the ATO lets you claim many of the costs of earning that rent. What you can claim, and how much, depends on who lives in the granny flat, what rent they pay and how the rest of your property is used. This guide explains the general rules in plain English so you can have a better conversation with your tax agent 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
- Deductions generally apply when the granny flat is rented, or genuinely available for rent, on commercial terms.
- If you rent to family below market rent, the ATO accepts limiting your deductions to the rent you receive.
- Some costs are claimed in the year you pay them, while the building and its fittings are claimed over several years.
- When the granny flat shares a block with your home, costs are usually apportioned and capital gains tax can be affected.
- Good records from day one make every claim easier to support.
When granny flat tax deductions apply
Granny flat tax deductions start with one question: is the flat earning rent? Most owners fall into one of three situations.
| How the granny flat is used | General tax position |
|---|---|
| Rented to tenants at market rent | Rental income is declared and related expenses can generally be claimed |
| Rented to family or friends below market rent | The ATO treats this as mixed use and accepts limiting deductions to the rent received |
| Lived in by family rent free | Generally no rental income and no rental deductions |
The ATO also looks at whether the property is genuinely available for rent. On its how to claim rental expenses page, it explains that a property counts as available for rent when it is advertised or managed as a rental on commercial terms.
In Victoria, a granny flat is a small second dwelling of up to 80m² on the same lot as an existing home. It can be rented out, but it cannot be subdivided or sold separately. Our guide on how to legally rent out a granny flat in Victoria covers the tenancy side.
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/).
Expenses you can generally claim each year
Many granny flat tax deductions can usually be claimed in the year you pay them. Common ones include:
- interest on the part of a loan used to build the granny flat
- council rates and water charges (the share that relates to the rental)
- land tax, where it applies
- building, contents, public liability and loss of rent insurance
- property agent fees and commission
- advertising for tenants
- cleaning, gardening and pest control relating to the rental
- repairs and maintenance
You cannot claim expenses your tenant pays, such as electricity or water they are billed for directly. If you plan to split bills, read how to split utility bills between your home and granny flat.
Repairs are not the same as improvements
In general:
- Repairs fix damage or wear that happened while the property was rented, such as replacing a cracked window pane. These are usually claimed straight away.
- Maintenance prevents deterioration, such as oiling a deck. This is also usually claimed straight away.
- Improvements make the property better or more valuable, such as adding a new feature. These are capital costs and are generally claimed over time rather than in one year.
If you do repairs and improvements together, the costs need to be separated.
Apportioning costs when the granny flat shares your block
Most granny flats sit behind the owner’s own home, so many costs cover the whole property. Council rates, insurance and some loan interest are common examples. The ATO expects you to apportion these so that you claim just the part that relates to earning rent.
When you rent out part of a property, the ATO describes an area-based method that compares:
- the floor area used only by the tenant
- half of any shared areas
- the floor area of the whole property
Loan interest also needs care. If one loan funds both the granny flat and private spending, the ATO expects the interest to be split between the rental and private portions. A separate loan for the build can make this simpler. See how to finance a granny flat build for an overview.
Depreciation: claiming the build over time
The build is not claimed all at once. Granny flat tax deductions for a new build generally come in two parts:
- Capital works deductions for the structure, such as the slab or stumps, walls and roof. These are spread over many years once construction is complete.
- Depreciating assets for plant and equipment that is not part of the structure, such as appliances. These are claimed over each item’s effective life.
Because the assets in a new build have not been used before, they are generally not caught by the ATO’s limits on claiming second-hand assets in residential rentals. However, if family lives in the granny flat first and it is rented later, assets used privately before it became a rental may not be claimable. Ask your tax agent before changing how the granny flat is used.
A quantity surveyor can prepare a depreciation schedule that separates these costs and sets out the yearly amounts. Our guide to granny flat depreciation schedules explains how they work.
Granny flat tax deductions and negative gearing
If your rental deductions are higher than your rental income, the result is a rental loss. The ATO explains that deductions for rental expenses can generally be claimed against your rental and other income, and any unused loss can be carried forward. This is commonly called negative gearing, and granny flat tax deductions are a big part of that calculation.
The rules on negative gearing for residential property have changed under new law that starts on 1 July 2027. Our guide to granny flat negative gearing in Victoria explains what the ATO has published and the questions to raise with your tax agent.
Capital gains tax when the granny flat is on your home’s block
Your home is usually exempt from capital gains tax (CGT) as your main residence. If part of the property is used to earn rent, the ATO says you may be entitled to a partial exemption, rather than a full one, when you sell.
In general, the ATO looks at:
- whether you could claim interest on a home loan for the rented part (the interest deductibility test, which applies even if you have no loan)
- how much of the floor area is set aside to earn income
- how long that part was used to earn income
A market valuation may also be needed when part of a home is first used to produce income. The ATO’s page on using your home for rental or business sets out the steps. For what happens when you sell, read what happens to your granny flat if you sell your Melbourne home.
Records to keep from day one
Good records support your granny flat tax deductions. Keep:
- the build contract, invoices and handover documents
- loan statements showing how the money was used
- the lease, rent receipts and bond records
- receipts for rates, insurance, repairs and fees
- a log of when the granny flat was available for rent and any vacant periods
- your depreciation schedule once it is prepared
What a G-Flat™ costs
Every G-Flat™ is a 60m², two bedroom turnkey build with a fixed price for each finish level, which gives your quantity surveyor and tax agent a clear starting figure.
| Finish level | Turnkey price |
|---|---|
| Affordable Lite | $195,000 |
| Affordable | $208,000 |
| Homestead | $218,000 |
| Signature | $238,000 |
| Luxe | $265,000 |
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.
Each price includes the building permit, all plans, connection of services up to 10m from the main house and a 10-year structural warranty. See our granny flat inclusions and granny flat pricing in Victoria for the full detail.
Rent and your numbers
Rents vary by suburb, finish and demand, so we do not publish rental estimates. A local property manager can give you a rental appraisal, and your tax agent can model the after-tax position using your own income and loan. Include vacancy, fees, insurance and maintenance. Our granny flat investment property guide covers tax and finance together.
Questions to take to your tax agent
Before you sign a build contract, ask:
- Will I rent the granny flat at market rent, to family, or not at all, and how does each option change my claims?
- How should shared costs and loan interest be apportioned on my property?
- Should I order a depreciation schedule once the build is complete?
- How will renting affect the main residence exemption when I sell?
- How do the negative gearing changes from 1 July 2027 apply to me?
Our granny flat investment checklist helps too.
Frequently asked questions
Can I claim granny flat tax deductions if family lives there?
If family pays no rent, generally not. If they pay below market rent, the ATO accepts limiting deductions to the rent received.
Can I claim the whole build cost in one year?
No. The structure is generally claimed as capital works over many years, and fittings are claimed over their effective life.
Do I need a depreciation schedule?
It is not required by law, but a quantity surveyor’s schedule helps your tax agent claim the right amounts each year.
Does renting a granny flat affect capital gains tax on my home?
It can. Renting part of your property may reduce the main residence exemption to a partial one.
Can Innovista give me tax advice?
No. We can help with build costs, design and timing. Please speak with a registered tax agent about tax.
Plan the build and the tax together
Granny flat tax deductions are easier to plan when your build, finance and tax plans line up before construction starts. A G-Flat™ takes approximately 5 months end to end, which gives you time to get advice. Book your free site assessment or visit our display G-Flat™.