CGT Main Res Exemption and GFs

Im often asked by people if a Granny Flat reduces the main residence exemption for their home if the GF is used to produce income.

The answer is YES. If the GF is used at any time to produce income it means loss of some of the main residence exemption. But it also means a % of ownerships costs of the land etc may add to deductions for the GF. Direct GF costs (eg depreciation of the structure) would be additional and specific to the GF.

The next part of the problem is - How much ?

Guidance for the issue is contained in the law which describes which property meets the exemption as a main residence. s118-115 of the 1997 Tax Act. It includes the land under teh dwelling used as the taxpayers home. In addition there is an adjacent land rule s118-120 which allows land adjacent to that dwelling of up to 2HA.

However the above doesnt include a separate unit of accomodation used to produce income. This gives rise to two issues which have different concerns.
1. Structure is permanently used to produce income.
2 Structure is not permanently used to produce income

So it is necessary to take the total land for the main residence and exclude the area of land NOT adjacent to the main dwelling. That may include areas of yard etc in use for the main home. Areas of land adjacent to the GF and the land under the GF should be thought of as a % of the total land attributable to income production. Then
1. (as above) - 100% of those ownership costs in that percentage may be deductible or
2. (as above) It may be necessary to take the % of ownership costs attributable to the ownership of the GF and its adjacent land and then apportion for the period of time that the GF was actually rented or held ready for use for rental eg Airbnb, lease etc. Take care - If the property is not also used as a adjacent area to the main residence the vacant GF may still be excluded from the CGT exemption.

The problem many encounter is how to apportion costs for the home. You effectively have two portions of the main residence. One part contains a house and land (CGT exempt and no tax deductions allowed) and the other has a GF perched on a section of land and some adjacent areas. How much of the ownership costs can be deducted for the GF each year ?? A valuer may need to advise on the way to apportion the costs between each purpose. You cannot deduct one portion from the total !! The % determined by the valuer would also be the portion of the loss of the main residence exemption subject to the issue of 2. apportion as noted above.

Example : Fred has a home and 1/3rd of the yard contains a GF. The other 2/rds of land includes his home. Total value is $1,000,000. How much of ownership costs may be subject to CGT and what % of ownership costs are deductible v's the GF which is rented full time ?
a. Fred needs a valuer to assist. the valuer considers the split of the land into two parcels. $835,000 for the home site and $165,000 (16.5%) for the GF. Therefore Fred does not apportion based on 1/3rd but claims 16.5% of all his property ownership costs (eg mortgage interest, rates etc)
In addition Fred claims deductions against the GF for
- Specific GF insurance for that structure. 100%
- Depreciation for the GF structure 100%
- EBM short stay LL policy 100%
- Share of water, elec etc....He considers 25% reasonable as separate meters arent used.

Fred is likely to use the 16.5% issue to reduce his main residence concession when sold if the rental is maintained for the whole occupancy period. Otherwise he may need to adjust the % down if the GF ceases to produce income eg his teen / adult children use it as part of the home for a period of time. A balancing adjustment to the sales proceeds may also occur for the structure of the GF at that time of sale.