Granny Flat at PPOR Tax Advice

Hi

I currently have a fixed loan for my PPOR (fixed for the next 13 months) but I am in the process of getting a separate loan for a granny flat extension. Once the granny flat has been built I will use it as part of my PPOR for 3 months then I will move into the granny flat and rent out the main residence. How would interest, depreciation, etc be calculated in this situation?

 

Depending on a few factors (building age, time since purchase, renovations, etc.) you'll want to investigate a depreciation schedule for the main house. The depreciation scenario shouldn't be unusual from what I gather. Is there anything specific you wish to know?

 

You will have to apportion the interest between the house and the granny flat. You will need to get a valuer to do this. Needs to consider land use and buildings. Once done you should split the loan and have an offset account attached to the loan for the one you are living in.

 

The ATO guidance sends the wrong message by looking at this issue backwards..Reda the section on other structures..https://www.ato.gov.au/General/Capi...ngs,-adjacent-land-and-associated-structures/

This confirms the association of the MRE with use. But taking it further How can you sell a GF separate to the rest ?? There is a argument that sale of a home with a tenanted GF may still be 100% exempt but a balancing charge occurs for the structure.

IMO in your proposal you substantially lose the main residence exemption and all you have is an exempt use of a structure that has little value. I have been working on a request for a ruling on GFs and this alternative approach (ie normally GF is rented) is the complex issue that has stalled it to date. It could be that none of the land associates with the GF and you end up with a CGT problem. I fear that with a GF the item is nothing but a structure on land and there may be limited deductions. You don't claim a % of interest for the land under your car either.

I would like to be wrong.

 

Should I not use the granny flat as part of the main residence for the first 3 months so that it is considered separate to the main residence, then the land associated with it would be CGT free? I have read this previously http://www.bantacs.com.au/QandA/index.php?xq=435 which made me think to make sure that initially I used the granny flat as part of main residence for CGT.

Because the granny flat is new and forms part of the whole residence I was hoping that I might be able to depreciate at this at a higher rate (sorry I know next to nothing about depreciation) even though it would only a proportion would be subject to depreciation.

 

Thanks for the replies, can anyone recommend a good valuer? I am guessing I shouldn't worry about the depreciation schedule until the build is finished?

 

Careful with reading things online and applying them to your situation. There is no three month rule. I would dispute that the land associated with a GF is exempt where the house (and land) are rented. IMO land cannot be counted as part of a GF. The GF is a mere structure. Like a shed. Just bigger.

IMO Julia's article is consistent with my view that if you live in the residence and rent a GF then the main residence exemption applies to 100% of the house and land and that when and if you sell you cant make a capital gain on a GF as its not a separate CGT asset. There is a balancing adjustment maybe to the CGT proceeds but as its exempt its a irrelevant issue. The GF is just a structure. My following concern with this view is that ownership costs such as rates cant be apportioned and its likely that most GF rental will generate positive geared outcomes but great yields. Its one of the attractive outcomes from a GF.

My draft ruling seeks to ask the question about the MRE absence rule. That needs to consider if the 6 year absence rule can be applied when you move out of the residence into the structure called the GF so that the house continues its exemption.

 

Do you need to pay CGT when you rent out a room from your home?
If not, then there is no reason to pay CGT on GF either.

 

Depreciation applies to all the physical assets that are part of your investment. If you're living in the granny flat then no part of it (barring maybe a few assets that are common to both the flat and the house) is regarded as an investment, whether it's on the same block as your house or not.

 

If you rent out a room in your home : yes CGT applies to the home as its not eligible for a 100% main residence exemption (pro-rata apportioning is required). IMO when a GF is rented out it may not result in a loss of the main residence exemption.

Selling a GF should not directly result in CGT as its not a CGT asset.

 

Interesting Paul. Would love to read your PBR when it is granted.

 

I don't want a PBR I want a public ruling. That's the complex bit. There are numerous angles to this. Everytime I think its there someone like Methodman throws a different issue in. That's all the stuff the ATO look at. Not just the key issue.

For example I have a reservation that the MRE absence rule may continue when you do what Methodman proposes as you don't move into a CGT asset when you move into the GF. Remember the MRE concerns CGT assets that satisfy the MRE. No CGT asset and the absence rule can work. eg if you live in a box on a street the MRE continues too. I don't think the ATO will give a ruling on that as its not in public interest.

 

Thanks for all the input. Will be in touch Paul in regards to tax. Chris will contact yourself for quote.