Renting Out Your Granny Flat: Income, Tax, and Everything You Need to Know

The family-only rental restriction is gone in every major state. Your granny flat can now be rented to anyone — students, couples, professionals, or strangers. That changes the investment equation significantly. Here's everything you need to know before you sign a lease.

Rental Income Potential by State (2026)

Tax: What You Must Declare

Rental income from a granny flat is assessable income — you must declare it on your tax return at your marginal rate. There is no exemption simply because it's on your own property.

What you can deduct against rental income:

• Interest on the portion of your home loan used to fund the granny flat
• Depreciation on the building (2.5% per year) and fixtures
• Maintenance and repairs (not improvements)
• Property management fees if using an agent
• Council rates (apportioned to the granny flat area)
• Insurance (granny flat proportion)

Important — CGT implication: Renting your granny flat to a third party means that portion of your property is no longer fully covered by the main residence CGT exemption. When you sell, you may owe capital gains tax on the granny flat portion. Talk to a tax accountant before renting.

Family Arrangements vs Commercial Rental

There are two fundamentally different scenarios, and the tax treatment differs:

Commercial rental (to unrelated tenants at market rent): Rental income is assessable, deductions apply, potential CGT exposure on sale.

Granny flat arrangement (formal agreement with a family member): The ATO recognises "granny flat arrangements" as a distinct category. If you enter a formal granny flat arrangement (a written agreement where a family member lives there in exchange for a lump sum payment or care), the CGT implications are different — the main residence exemption may still apply. The ATO has a specific ruling on this (TR 2022/1). Get tax advice before structuring a family arrangement.

Landlord Responsibilities

Renting your granny flat makes you a landlord under state tenancy legislation — the same rules that apply to investment properties apply here:

• Provide a written lease (standard residential tenancy agreement)
• Lodge a rental bond with the relevant state authority (RTA in QLD, NSW Fair Trading, Consumer Affairs VIC, etc.)
• Maintain the property in a habitable condition
• Conduct a condition report at start and end of tenancy
• Give proper notice before entering the property
• Follow state-specific rules on rent increases and lease termination

The fact that the tenant lives on the same block as you doesn't create any special exemption — all standard tenancy rights and obligations apply.

Practical Considerations: Sharing a Block

Before signing a lease with a third-party tenant, think carefully about:

• Shared services: Who pays for water? If on one meter, how do you apportion costs?
• Parking: Is there space for both the main home and granny flat occupants?
• Privacy: Can the tenant access their unit without walking through your garden?
• Noise and amenity: How close is the granny flat entry to your main bedroom windows?

These aren't deal-breakers, but they're worth designing for before you build — changing access paths and utility metering after construction is expensive.

Insurance

Your standard home insurance may not cover a rented secondary dwelling. Tell your insurer before renting — you may need landlord insurance for the granny flat portion, which covers malicious damage by tenants, loss of rent, and tenant liability. Landlord insurance for a granny flat typically costs $800–$1,500/year.