Rent from a second home at market rates is taxable income, and the costs of the rented part are deductible: the interest on the share of the loan that paid for it, rates and insurance apportioned, repairs, and the construction cost itself as a capital works deduction, 2.5% a year over 40 years for a residential building started after 15 September 1987. The cost comes at sale: renting out part of the home means the main residence is no longer fully exempt from capital gains tax, and the rented share, worked out by floor area and time, is taxed when the house is sold. Capital works deductions claimed come off the cost base too. Family is different: a relative paying towards the household is a domestic arrangement, not income, with no deductions, and a written, non-commercial granny flat arrangement for an older or disabled relative has its own CGT exemption since 1 July 2021. This is general information, not advice for a particular taxpayer.
While it is rented
| Item | The ATO's position |
|---|---|
| Rent | Assessable income at market rates, declared in the return |
| Interest, rates, insurance, repairs | Deductible for the part of the property that is rented, apportioned, for the period it is rented |
| Capital works | The construction cost, not the land, at 2.5% a year for 40 years from completion for a residential building started after 15 September 1987, only for the days it produced income. A quantity surveyor's estimate stands in where the real cost is unknown, and that fee is deductible |
| GST | None. Rent from residential premises is input taxed: no GST on the rent, none claimable on the costs, and it does not count toward the registration threshold |
| A relative paying board | A domestic arrangement, not rental income, and no deductions |
When the house is sold
The main residence is exempt from capital gains tax for an Australian resident, but the ATO applies an interest deductibility test: if a deduction for loan interest on part of the home would be allowed, that part is subject to CGT to the same extent, whether or not a loan exists. Renting out a second home on the lot passes that test. The assessable gain is the home's gain since it first earned income, multiplied by the rented floor area as a share of the whole and by the rented period as a share of the time. Renting for five years out of twenty on a flat that is 15% of the floor area taxes a small slice, not the house. Capital works deductions claimed reduce the cost base, so they are recovered in part at sale. The ATO's property exemption tool does the arithmetic; a registered tax agent is worth the fee on this one.
The granny flat arrangement exemption
From 1 July 2021 capital gains tax does not apply when a granny flat arrangement is created, varied or terminated. The arrangement is a written agreement giving an individual the right to occupy a property for life. It is exempt when the owners are individuals, the occupant has an eligible interest, and the arrangement is written, binding and not commercial in nature. The ATO's own example is a parent paying $500,000 toward a flat on a daughter's property under a written arrangement: no CGT for the daughter on granting the right. The exemption covers only the arrangement itself; a later sale of the property follows the normal rules. Charging market rent makes it commercial and takes it out of the exemption. The pension side sits with Services Australia and is assessed separately.
Decide before the lease, not after
- Family at board, or a tenant at market rent. The first keeps the full main residence exemption and no deductions; the second brings deductions and a CGT share.
- If a tenant: get the construction cost documented from day one, and a quantity surveyor's schedule if the maker's invoice does not split it.
- If a parent: a written granny flat arrangement before the money moves, drafted by someone who does them.
- Either way: keep every receipt, and apportion on floor area with a plan to show it.
Renting out a granny flat in Queensland covers the tenancy law and insurance that sit beside the tax.
See it for your block
Questions people ask next
Is rent from a granny flat taxable?
Yes, at market rates it is assessable income, and the costs of the rented part are deductible: apportioned interest, rates, insurance, repairs and the construction cost at 2.5% a year for 40 years. A relative paying board is a domestic arrangement, not income.
Does renting out a granny flat affect capital gains tax on my house?
Yes. The main residence exemption no longer covers the rented part. When the house is sold, the gain since the flat first earned income is taxed in proportion to the rented floor area and the rented period, and capital works deductions claimed reduce the cost base.
Is there a CGT exemption for a granny flat for parents?
Since 1 July 2021, creating, varying or ending a written, binding, non-commercial granny flat arrangement that gives an individual the right to occupy a property for life does not trigger CGT. A later sale of the property follows the normal rules.
- ATO, work out your capital works deductions (2.5% for 40 years, income-producing days only), read 16 October 2026
- ATO, using your home for rental or business (partial main residence exemption, the interest deductibility test, floor area and time), read 16 October 2026
- ATO, granny flat arrangements and CGT (exemption from 1 July 2021, the conditions), read 16 October 2026
- ATO, rental properties guide, read October 2026
- ATO, GST and residential premises (input taxed), read October 2026
- RTA, median rents quick finder, read October 2026