I have just completed building a granny flat on my property (Converted a Garage)
I wish to Rent out the cottage for AUD 300/week
Cost of build was AUD10 000 owner build and have slips. Value is well over 70k if a builder was called in.
My initial loan on the property was 500k Plus I took a further line of credit of 80k for the puroses of property improvement
The question is a Can I claim a portion (in proportion to cottage size) of the interest paid on the total property. (500k) and if so from when can I claim. for eg Started building 15 months ago, Got council DA some 10 months ago
I am assuming the granny flat is on the same property as your home. You cannot get any deductions for your own labour.
This will cause your home to be considered partly income producing, if this is the first time this has occurred and it has always been your home since purchasing it then your cost base on the property will reset to the market value at the time you first rent it out and while the granny flat is rented out that portion of your property will not be entitled to the main residence exemption.
You could argue that you can claim the interest from the time you applied that part of the property to be converted to the granny flat but only if it had not been used for private purposes in any way during that time. It may not be worth claiming as that will only increase the amount of time the whole property is not covered by your main residence exemption and reset the cost base to the market value before you did the improvements. At least if you delay the cost base will reflect the value of your labour.
As for what interest you can claim, you can certainly claim the interest on the $10,000 actual cost of improvement but you will have difficulty using size to justify apportionment of the original $500k loan. The basis of apportionment has to be reasonable and the cost of buying a garage on a sqm basis is much less than your home. I recommend you find out what it would have cost you to buy the vacant land back then and apportion that on a sqm basis, include yard used by the granny flat as well. Then add to this amount the estimated cost of building the garage if it wasn’t too old back then. If it was older you may need to depreciate it by 2.5% pa. You could ask a valuer if you are prepared to pay for an opinion but remember when it comes to apportioning the $500k loan it is all about a garage not a granny flat.