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We owned a rural property just over 1 acre (0.4Ha) with a dwelling and attached granny flat for 10 years. The granny flat was originally built for the previous owners’ parents so it was more like an extension to the main residence rather than a separate dwelling, it was separated by a common party wall but there were no fences separating outdoor spaces, a single driveway, shared swimming pool, etc.
When we purchased the property we lived in the granny flat for 3-4 months while we carried out minor renovations to the main residence.
We first rented out the granny flat about 11 months after purchasing the property. We rented the granny flat at four different times for a total of 2579 days out of a total of 3626 days. One of the families that rented the granny flat were in need and their rent was heavily discounted (about 75% discount), the rental fee included water rates and usage.
About fives years from the purchase date we carried out larger renovations to the house. In fact we transformed property including renovations to the house, swimming pool, fences, driveway and gardens. The granny flat was essentially part of house and although the renovations included external walls and roof to match house, the internal spaces were not renovated. The state of the granny flat made it more difficult to rent out and needed some work to flooring prior to selling. Although we thought the granny flat would be beneficial to the sale it became clear after many inspections and feedback that most people were not interested in one so close to the main residence, especially since it needed a renovation.
For some time, while the granny flat was vacant, I also used the granny flat as my office during a transition of my business, however my business did not pay rent for the use of this space.
Finally we were able to sell the property in 2023 and we have been investigating the impact of CGT and hoping it is not excessive.
We have read that the value of a granny flat can be determined as the ratio of the area of the overall building. I have also read there are deductions and concessions, these would be helpful to understand, however my main area of concern is that with a rural property the value of a granny flat (in my opinion, backed by the feedback received during the selling process) is not in direct proportion to the total area of the building. The value of the land is much larger than the buildings. The other point is that although the granny flat was not renovated, under the area ratio method it benefits from the improvements to the main residence and surrounding land.
Are you aware of a more accurate way of determining the value of a granny flat withn a rural property?
Thank you in advance.
Answer
TD 1999/69 https://www.ato.gov.au/law/view/pdf/pbr/td1999-069.pdf determines whether a property with a granny flat is one or two dwellings. It is all based on how it started life. For the first 11 months I would say the two dwellings were treated as one dwelling so I will answer the question on this basis and I think that could possibly be the best outcome for CGT purposes anyway but we will not know without crunching the numbers and we would need to speak to involve a valuer.
Whereas if they are just one dwelling it is just a matter of apportionment. I attach a spreadsheet (The Protecting Your Home from CGT Product) that will help you collate all the information you need, it explains how the calculation would work. When putting the numbers of days exposed to CGT in the estimate you take the number of days rented and multiply them by the percentage of the whole property that was rented. As you say sqm is the traditional method. The law requires a reasonable method of apportionment. You have already set that when you decided what percentage of the property costs to claim against the rent income.
As this is just one dwelling this is treated as if you have rented out a few rooms in your home. Here is a link to a blog on that issue generally https://www.bantacs.com.au/Jblog/renting-out-a-room-in-your-home/#more-1370 At the 11 month mark when the property was first used to produce income its cost base is reset to market value at that time. The minor renovations before that date are not included in the cost base. I hope they are reflected in the valuation. From that point onwards you need to keep a record of everything associated with the property that you have not otherwise claimed a tax deduction for, even cleaning materials, more detail in the spreadsheet. The renovations at the 5 year mark are also included in the cost base. The way the formula works is, a portion of the costs not associated with the period of time you rented the granny flat out will decrease the gain on the property relating to when and where you rented it out. This is because the whole capital gain is first calculated than apportioned by days not covered with the main residence exemption compared with the whole period of ownership. These days are the number of days the granny flat was rented out multiplied by the percentage of the area of the whole property that the granny flat is. This percentage you have already set when deciding what portion of expenses to claim against the rent. It actually works in your favour as far as the renovations at the five year mark go because they will be included in calculating the whole capital gain before it is apportioned. Regarding the period of time you used it as your home office, this could still be considered main resident days as long as you did not see clients there, have signage etc and you only claimed a tax deduction for the increased costs as a result of you working there. By this I mean claiming for electricity and cleaning but not claiming a share of the rates or interest on the loan because that would not have increased because you were working from home.
To have the market value of the various areas taken into account in calculating the capital gain the property would need to be considered two dwellings and I am not sure that is going to work to your advantage anyway. Have a go at the numbers, by the time you include holding costs such as rates, insurance, interest etc that you did not claim against the rent, then take into account the 50% CGT discount it might not be that bad.
