Are Granny Flats Subject to Property Taxes?
Granny Flats
Adding Granny Flats to your property can increase the demand for your home by providing an opportunity for rental income that is separate from the main house. This can be particularly beneficial to young families who want to purchase in a desirable location but may not have the budget to afford an entire property.
It can also be a great way for retired people to help their children or grandchildren get on the property ladder. Having a granny flat can give older relatives the opportunity to remain in their home and continue to be involved in community activities, socialise with family members and neighbours, or just enjoy the lifestyle that they have become accustomed to.
The main issue that is likely to be faced with a Granny Flats is the effect it can have on Capital Gains Tax (CGT). Generally, an individual’s main residence is exempt from CGT. However, the addition of a granny flat to a home can cause issues when it comes to selling the property.
Are Granny Flats Subject to Property Taxes?
CGT is paid on the difference between the price at which a property is sold and the original purchase price. The problem that is caused when a granny flat is added to an existing home is that the CGT calculation of the main house and the granary flat are mixed together. In order to avoid any CGT issues when it comes time to sell the property it is important that a valuation of the original home and the new granary is undertaken as soon as possible after construction of the granny flat. This will ensure that the cost base of the old home is re-established and that any CGT exposure will be minimized.
Depreciation is another potential issue that can be encountered when a granny flat is built. If the granary is rented out, deductions can be claimed for depreciation on the building and its fixtures and fittings. If the granary is used for other purposes, such as by non-paying family members or friends, this cancels the deduction and it is only claimable under a pro rata formula.
Each state has its own rules regarding the taxation of Granny Flats. In Florida, for example, homeowners who add living quarters for a parent or grandparent can apply to have their property’s assessment reduced under the ‘Assessment Reduction of New Construction for Parent(s)/Grandparent(s) Living Quarters’ exemption. This allows for an assessment reduction of up to 20% of the original homestead assessment. Homeowners should check with their local government to ensure that the property meets the requirements for this exemption. Often, a quantity surveyor will be required to assess the suitability of a property for this type of application.