Renting out a granny flat is allowed in Victoria, but the rent is taxable income, renting at market rent can reduce your home’s capital gains tax exemption, and short stays under 28 days pay a 7.5% levy, even when the flat is on the same land as your home. A written, non-commercial arrangement with a parent of pension age is exempt from CGT.
Rent is income in the year you receive it. The flat’s own costs, such as interest on a loan used to build it, repairs, its insurance and depreciation on the building and fittings, can be claimed against it. Costs shared with your home, like rates, are split, usually by floor area. Keep the build invoices: they set your depreciation and your cost base.
Typical Melbourne rents and yields are on the rent and ROI calculator.
Your home is normally exempt from CGT. Once part of the property earns rent, that part may lose the exemption for the time it was rented, worked out by floor area and time. On a 60 m² flat behind a 200 m² house, that share can be meaningful, so get advice before you sign the first lease.
The exception is a granny flat arrangement: a parent or relative gets a right to live in the flat for life in return for money or property. From 1 July 2021 the ATO does not apply CGT when one is created, varied or ended, as long as the person has reached pension age or needs help because of a disability, the agreement is written and legally binding, and the arrangement isn’t commercial. Paying market rent makes it commercial.
From 1 January 2025 Victoria charges a 7.5% levy on total booking fees for stays of less than 28 days, including cleaning fees. Your own principal place of residence is exempt, but the State Revenue Office lists a granny flat or other separate residence as levied even when it is on the same land as your home.
Council rates follow the property value, so expect them to rise after the next valuation. Land tax in Victoria has its own rules for a home that also earns rent; ask the State Revenue Office how renting the flat affects you before you commit.
Yes. Rent from a granny flat is assessable income. You can claim the expenses that relate to the flat, and a share of shared costs such as rates and insurance.
It can. If you rent the flat at market rent, the part of the property used to earn rent can lose some of the main residence exemption when you sell. Renting to family under a written, non-commercial granny flat arrangement is treated differently.
Since 1 July 2021, CGT doesn’t apply when a granny flat arrangement is created, varied or ended, if the person living there has reached pension age or needs help with day-to-day activities because of a disability, the agreement is in writing and legally binding, and it isn’t commercial. Market rent counts as commercial.
Yes. Victoria charges 7.5% of total booking fees on stays under 28 days from 1 January 2025, and the State Revenue Office says this applies to a granny flat even when it is on the same land as your home. Long-term leases of 28 days or more are not levied.
Usually. Rates are based on the property’s value, and a new dwelling raises it at the next valuation.