Granny Flat Depreciation – A Complete Guide

Many see granny flats as an easy rental property investment. For beginners, they offer the opportunity to start investing, without spending too much money. As with any investment property, you must remember to claim for the depreciation of your assets.

Tons of people like the idea of buying an investment property. Australia offers plenty of opportunities, but many struggle to overcome the initial financial barrier.

You may find yourself asking how to invest in property with little money. A granny flat may be the answer. They cost less than most other types of investment property. Plus, you still get to claim for the depreciation of the property’s assets.

So, what are granny flats, and how can you claim tax depreciation?

Granny flats were modest dwellings located behind properties. They were used for aging parents or rented out for extra money.

Since councils have eased rules over the last decade, building granny flats is easier now. They might also increase the yield of an existing property with minimal investment.

Think about it. Rather than borrowing $500,000 for an investment rental property with a 5% yield, consider investing $100,000 to build a Granny Flat on your property. This could fetch similar or nearly similar rental income!

Therefore, by constructing a granny flat, you’ve effectively tripled your yield while taking on less debt. The saved debt can be injected into expanding and reducing the risk in your portfolio.

Adding a Granny Flat will also increase the capital value of your existing asset. And in a strong economy with a shortage of affordable housing, the demand for this type of rental is likely to grow.

What are the size regulations for building my Granny Flat?

So what can I build on my property? You can build a Granny Flat on your property if it’s less than 60m2 and doesn’t exceed 40% of the area of the existing residence, pending council approval (STCA). And it doesn’t matter if that residence is your own home or investment property.

Note that this may vary slightly between councils.

Can you claim depreciation deductions on the granny flat?

Whilst you can’t claim depreciation deductions on your owner-occupied property – you can depreciate your Granny Flat if it is an income-producing asset. Items like appliances, carpet, hot water units and air-conditioning can all be depreciated at the same rate as an investment property.

The bulk difference in the claim will be for capital works at 2.5%. This is obvious as the structure is smaller, but remember you haven’t spent a lot of capital outlay and have just increased your yield.

A Granny Flat might not be for everyone. Some owners might prefer to install a pool or just like having a substantial block of land for the kids to play in. But if you are considering a Granny Flat, make it a good one. After all – it could you in there one day!

Request a Granny Flat Depreciation Schedule today.

Do I Face Construction Restrictions?

You do, and they depend on the state you build the granny flat in. Each has its own rules concerning the size. For example, a granny flat cannot exceed 60 metres squared in New South Wales. However, you can build up to 90 metres squared in the Australian Capital Territory.

Exceeding these limitations changes the status of the granny flat. This could affect how you claim tax deductions. Australia has several states, so you need to get informed before building.

Claiming Depreciation

One key question you must ask when buying an investment property: what can I claim? Granny flats are no different. Just because you’ve constructed the property on your land doesn’t mean you can’t claim depreciation.

As a secondary dwelling, a granny flat must produce an income before you can claim depreciation. Assuming that’s the case, you can claim depreciation for capital works. These include the wear and tear the structure undergoes during its lifetime.

You can also claim for plant & equipment depreciation. In a typical granny flat, this means you can claim depreciation for the following assets:

• The hot water system
• Pumps
• Alarm systems
• Ceiling fans
• Air conditioning units
• Curtains and blinds for the windows
• A range of kitchen appliances and assets
• The bathroom’s freestanding assets

You can also claim depreciation on the granny flat’s areas with your home. For example, you could claim a pool or a patio, assuming the tenant uses these assets.

As you can see, that covers a lot of ground. Research suggests that you could claim over $5,000 in depreciation on a granny flat for the first year of ownership. This figure increases to almost $24,000 over the first five years. That’s about one-fifth of the value of the average granny flat in just five years.

What would my savings on tax deductions look like?

You can use our depreciation calculator. One of the only calculators to draw on real properties to determine an accurate estimate. It allows you to work out the likely tax depreciation deduction on your investment property.

The final word on getting a depreciation schedule

As you can see, granny flats offer high yields and plenty of opportunities for property investors to claim depreciation. That’s why they’re considered one of the best options for property investment for beginners. Manage the Flat correctly, and it could generate thousands of dollars in income in a short time.

However, you need help to create a full depreciation schedule. Without using a Quantity Surveyor, you may end up failing to claim the total depreciation of your assets. Contact Washington Brown today to quote a granny flat depreciation schedule and claim depreciation this financial year.

About Tyron Hyde

Tyron Hyde is the CEO of Washington Brown Quantity Surveyors. He is regarded as one of the industry's leading experts in property tax depreciation, is regularly quoted in the media & asked to speak at conferences.

Learn why more Property Investors Choose Washington Brown to prepare their depreciation reports.