Granny Flats

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Hi Margaret, 
 We own a five acre block near Darwin with a four-bedroom house under renovation. 
 My hubby is a 65 year-old self-employed tradesman and as we are not overly endowed with super, had the idea that if he built a small residence (granny flat) on same block with separate power, water etc, we could base ourselves there and rent out the main dwelling for income.
We would also caretake the block, e.g. mow lawns, remove palm frond,s etc. (There are a lot of properties this size in this area which build granny flats /dependant units and rent those out seemingly with no trouble planning-wise it seems.) We can’t subdivide five acres here. 
 Can you please advise if our idea is even feasible tax wise before we look into it further? I realise it is a pretty broad query! 
 Many thanks, 
 Jane 
 
Dear Jane,
This is an interesting question and one which is not often asked, and so I referred to Julia Hartman, a great expert on these more obscure scenarios.
She has said that there are many things to consider, the main one being the capital gains tax exemption for your principal place of residence. Once the granny flat is built, if you moved into it immediately, then from a tax point of view this would be treated as two separate properties. Once you rent out the former family home, the cost base of that property is considered to be the market value at the time. The granny flat and the land underneath it would also be given a market value.
At this point you would have to choose which one you wanted covered by the main residence capital gains tax (CGT) exemption – and ahead of time it can be really hard to work out which of the two is likely to have the greatest amount of growth.  If you choose the former family home to have the exemption, then the granny flat and its land will have CGT from its determined market value, and if you choose the granny flat, then the family home will attract CGT from the market value established upon you moving out.
If you don’t want  the property to be treated like two separate assets,  then you need to live in both the granny flat and the house, combined as your home, for the first three months at least.  This way, the two houses are seen as one dwelling,  and for CGT purposes the treatment would be just the same as if you were renting out rooms or part of your home.  This of course exposes the whole property to CGT from the market value of the whole property at the time the granny flat is built, but only for the portion of the home which was rented out – and so it’s done on a pro rata basis.
As you can see – its complex! It’s going to be really hard to actually work out which pathway is the best one to take, since you can’t really estimate future values.  Make sure that you have an accountant who can help you work out some ballpark figures and don’t make any decisions until you have a clear understanding of what could potentially happen in the future.
Regards,
Margaret.
<hr>
Margaret Lomas is a best-selling author and writes and hosts the popular Property Success With Margaret Lomas and heads up the panel on Your Money, Your Call, both on Sky News.
She is the founder of <a href="https://destiny.com.au/dotnetnuke/en-au/home.aspx" target="_blank" rel="nofollow">Destiny</a>.
Have a property question? <a href="mailto:askmargaret@propertyobserver.com.au" target="_blank">Ask Margaret!</a>
 
 
 
 
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mlomas-KC9MUPZ6Ca

How will building a granny flat work out tax wise?

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If there’s one thing which this country doesn’t have a shortage of it is property schemes and ‘gurus’ who promote these schemes to the vulnerable property investor. The defence housing scheme and National Rental Affordable Scheme (NRAS) now has competition from another scheme.
This scheme is sweeping places such as Sydney, Adelaide, Perth and Ipswich. It’s the granny flat (yes, the granny flat!); the next epidemic that will give plenty of property owners grey hair.
The logic of the granny flat goes like this: “Pick an area where the local government zoning permits granny flats, buy a house, spend $100,000 to build a granny flat on it, rent out both properties, and bring in a double-rent bonanza!”
Clever, right? Wrong!
I see it a lot where property investors get caught up in the higher than normal rental return of a property at the expense of the ultimate potential for capital growth. Don’t get me wrong, the rental income has importance however let’s not lose sight of why we are actually investing. For a majority of people, they invest so that one day they will have the financial freedom to exit the workforce with an income stream that will give them a significantly better lifestyle than they’d get on a taxpayer-funded pension.
At first glance, you’d think a granny flat with its capacity to bring in more rent from one property would be the perfect way to ratchet up those retirement funds. How close will you be to retiring by owning a property that is cash flow positive to the tune of (say) $2,000 per annum? How many granny flat properties will you need to acquire in order to sail the Bahamas? And, how will you fund future dual-living duds like this?
Sure, the granny flat property will grow in value over the years, but its growth will be directly influenced by the buyer demand for it. And this is where the rubber really hits the road.
Think about this scenario logically: who wants to buy a granny flat property? It has to be a buyer who doesn’t mind someone else living in their backyard and the various annoying behavioral traits of each new tenant. That buyer probably is not a young family, a baby boomer, or a young professional couple.
Most often, granny flat properties only appeal to investors. The number of owner-occupiers choosing a granny flat property over any other more conventional home is minuscule. According to the latest Census data, only 25% of all properties are investor-owned. So, to invest in a granny flat property is to sink a heap of money in to an asset with a very small basket of future buyers and to ignore the much bigger basket brimming with first home buyers, renovators, upgraders, downsizers and investors (75% of the market actually)!
Granny flats fall under Propertyology’s category of ‘specialised properties’: properties which only appeal to a very select population segment. These properties have lower demand than a more conventional property.
There’s been a rise in the number of property valuers not supporting purchase prices for properties with a granny flat. Spending $100,000 to build a granny flat on an existing detached house block rarely adds an extra $100,000 in value. Why? Because granny flats aren’t pretty and there are far less teetotalers than willing grannies (buyers).
There is a growing number of ‘property consulting’ companies out there spruiking new houses with granny flats on them to investors. With the gift of the gab and more glossy brochures than you can poke a stick at, these are often the same ‘consultants’ who ran out of NRAS stock and / or are suddenly struggling to make a buck from selling defence housing.
The extra rental income isn’t everything that’s it made out to be either. There is often a longer vacancy period between tenants because a lot of people are turned off at the thought of having a stranger live in their backyard. And those tenants who are interested will demand a lower rent. Property management and letting fees will be applicable to each dwelling and there is increased potential for tenant conflicts.
Banks have a more conservative credit policy for granny flats. When assessing a borrower’s affordability banks will often significantly discount the potential rental income. They often will also limit the amount that they will lend against granny flat properties. Think about why banks would do this.
If you are still um-ing and ar-ing about whether the cash flow positive granny flat is an ideal strategy for stopping work one day, think about this:
Property investor ‘A’ and property investor ‘B’ both have $500,000 to spend. Investor ‘A’ spends his money on a specialised property while investor ‘B’ spends hers on a conventional property. 10 years pass and the conventional property has grown in value in line with the broader Australian market at 6% a year and will then be worth $895,000. The smaller buyer pool for the specialised property has resulted in an increase in value by 4% a year for an end value of $740,000. It’s not rocket science figuring out which property will make a bigger contribution to that retirement nest egg.
On the surface, the dual rental income creates an allure that granny has become youthful again. But, take off the rose-coloured glasses and you’ll discover that, beneath all that botox and bottled-blonde hair is the genuine granny. My advice: keep your granny, but ditch the granny flat. It’ll save you years of grey hair!
Simon Pressley is managing director of <a href="https://www.propertyology.com.au/" target="_blank">Propertyology</a>, a full-time property market analyst, accredited property investment adviser, and the REIA's Buyer’s Agent of the Year (2012 and 2013).
                                     
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spressley-sBoeMhannA

Keep granny, ditch the flat

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Legislative changes, house price and rental demand increases, in conjunction with a housing affordability crisis, have apparently prompted the creation of Granny Flat Finder, a tech start-up that is filling the niche of granny flat developments.
Ever since the changes in New South Wales allowed investors to achieve dual income by building a granny flat on applicable blocks, there has been substantial interest in the strategy. Most recently, ACT has updated their legislation, <a href="https://www.propertyobserver.com.au/australian-capital-territory/granny-flat-size-allowance-increased-in-act/2014021067684" target="_blank">allowing granny flats to be larger and more appropriate as rentals</a>.
Since trading in December 2013, <a href="https://www.grannyflatfinder.com.au/" target="_blank">Granny Flat Finder</a>, a marketplace for investors to locate builders and designs, has listed over 50 builders covering 15% of the market, and is receiving 1,200 views per day.
Director of Granny Flat Finder Pty Ltd, Jay Wright, built the site to task all the hassle out of options and the complicated laws and processes. “[Our] research had suggested this was a growing market, however the demand has been unprecedented. This week alone we have had over 100 enquiries submitted to builders through the website from customers looking to have a granny flat built,” said Wright.
Designs can be filtered in terms of one, two and three bedroom designs, and builders have online profiles in a classified-style collection.
The website also provides white papers, guides, tips and legislation.
The January report of the site saw 3,000 views on Granny Flat Finder, 16,000 views of designs and builder profiles and 217 customers enquiring.
For your interest: <a href="https://www.propertyobserver.com.au/renovating/the-four-pros-and-four-cons-of-building-a-granny-flat/2013082564469" target="_blank">Four pros and cons of building a granny flat</a><a href="https://www.propertyobserver.com.au/renovating/the-four-pros-and-four-cons-of-building-a-granny-flat/2013082564469" target="_blank"></a>
<a href="mailto:jduke@propertyobserver.com.au" target="_blank">jduke@propertyobserver.com.au</a>
                       
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jduke-EHk3XBmHkn

Granny flat demand at record levels, prompting online start-up “Granny Flat Finder”

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There have been a few recent changes to the NSW affordable housing state environmental planning policies (SEPP or AHSEPP).  This policy was introduced in July 2009 to increase the supply of affordable rental and social housing in NSW.
Since then, Property Bloom has been busy doing our bit to help with affordable rental properties in the Hunter region of NSW. 
A typical, new two bedroom granny flat or single villa will rent for just $250 - $280 per week.  Compared to a typical house in these locations, tenants can save around $50 a week and these are pretty good digs being offered and in some cases much better than the 80 year old miner’s cottages asking for higher rents. 
The flats meet all the<a href="https://www.basix.nsw.gov.au/basixcms/about-basix/basix-assessment/basix-certificates" target="_blank"> Basix requirements</a>, which means they are energy efficient. They are functional and about the same size of some of the miner’s cottages but of course being brand new have none of the issues of older homes.  
 <img src="/images/2014/05/02/chivers%20may%201%20two.jpg" alt="">
 <img src="/images/2014/05/02/chivers%20may%201%20one.jpg" alt="">
On the 14 February 2014 there were some new changes introduced to the AHSEPP.  Probably the most important was the change to the period in time the complying development assessment can take.
Previously it was 10 days and it has now been extended to 20 days. This is because the neighbours now need to be notified of the application to build a granny flat.
In the past, the neighbours were not notified and may have realised all too late that granny was coming to their close proximity.  Neighbours of the complying development now get to know what’s going on next door - which I think is a good thing.
They have 14 days to lodge any complaints or ask any questions of the certifier. They can’t really stop a granny flat being built unless the application is not meeting all the requirements of the policy; however they have the opportunity to discuss any concerns and check plans. I think this is fair and it’s always good to have some kind of relationship with your neighbours. 
Imagine you live in a high density area where the land size is quite small; say 450-500 square metres blocks and the house next door starts to build a granny flat. There is not a lot of space for the tenants of the flat to chill out so they hang right on your fence line when they have a BBQ which happens to be next to your bedroom window. This is not a good situation for anyone.
Property Bloom always looks for large lot sizes for our granny flat developments, land that is 800 square metres – 1,000 square metres so there is plenty of yard space for both the house and the flat.  This is one of our main criteria but we have a long list of other criteria that we need to meet before we will present a property to our clients for such a development.  Our goal is to maximise the rent from the house and the flat but if the positioning of the flat is too close to the house, it just won’t work.
When you get it right, this strategy works well but I’ve heard of some horror stories where investors have just squeezed on a flat, yet still meeting the AHSEPP requirements but not thinking about the consequences; unhappy neighbours, and unhappy tenants.   
For a granny flat development to work for property investors it needs to result in a high rental yield, be well designed so that there are no issues down the track and maximise depreciation benefits of the property. 
Check out the video here where we explain <a href="https://www.propertybloom.com.au/services/granny-flats" target="_blank">some of the pros and cons of building a granny flat</a>.
<a href="https://www.propertybloom.com.au/" target="_blank">www.propertybloom.com.au</a>
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jochivers-wq5Bp59R5a

Granny meets the neighbours

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GUEST OBSERVATION
A “granny flat agreement” is an informal arrangement between a parent and their adult child or children. The parent (often elderly) contributes funds to create granny flat accommodation either by modifying a home or by buying a suitable property in the name of the children. In return they agree to provide the parent with a lifetime right to live in the granny flat, or at least until the parent needs residential care.
Many of these arrangements work out well. The older person then enjoys the love and support of having their family close by as they age.
When an arrangement of this kind goes wrong, however, it can seriously threaten the wealth, autonomy and dignity of the elderly parent. If the relationship between the parent and child, or child’s spouse, breaks down and the parent is asked to leave the property, he or she may be left with nothing.
How does the law treat granny flats?
The parent’s only chance of recovering her contribution is to go to court. These court cases depend on applying a complex set of rules.
The parent must prove the contribution was not a gift but that they supplied funds as part of an arrangement that the parties would live together. Agreements creating interests in land need to be <a href="https://www.legislation.nsw.gov.au/#/view/act/1919/6/part4/div1/sec54a" target="_blank">in writing</a>, and usually there is no written agreement.
The court can apply <a href="https://www.translegal.com/legal-english-dictionary/equitable-principle" target="_blank">equitable principles</a>. A parent who contributed to improving the property ought to have the contributions back, or a proportionate share of the property returned if the arrangement ends prematurely, because it is unjust for children to retain the benefit of the contribution without providing the granny flat.
Where the court finds that the parent relied on a promise by the child that the parent would have an interest in the house, or at least a right to live with the child for life, the child can be required to repay the contribution.
This often means the child must sell their house if they cannot refinance to obtain the money to pay the parent. If the parent is entitled to a share of the property, the house has to be sold to realise the parent’s share.
The problem for parents is that court cases cost money, unless Legal Aid is available, but only parents who are truly destitute qualify for assistance. The parent has to produce evidence of the arrangement or the promise. They often have to recount conversations from many years ago to prove there was an arrangement. The children have to spend money on their own lawyers.
Parents and children very rarely put these agreements in writing and almost never consult a lawyer. Sometimes, to help the child get finance, a parent may have told the lender the contribution was a gift.
All this makes court cases complex, difficult and expensive.
In New South Wales, the <a href="https://www.propertyobserver.com.au/https://www.legislation.nsw.gov.au/%7E/view/act/1984/147" target="_blank">Property (Relationships) Act 1984</a> may apply to granny flat disputes, but the parent still has to show how they contributed to the child’s property. Other states and territories – including <a href="http://classic.austlii.edu.au/au/legis/vic/consol_act/ra2008173/" target="_blank">Victoria</a>, <a href="https://www.legislation.sa.gov.au/LZ/C/A/DOMESTIC%20PARTNERS%20PROPERTY%20ACT%201996/CURRENT/1996.51.AUTH.PDF" target="_blank">South Australia</a>, <a href="http://www7.austlii.edu.au/cgi-bin/viewdb/au/legis/tas/consol_act/ra2003173/" target="_blank">Tasmania</a> and <a href="http://www7.austlii.edu.au/cgi-bin/viewdb/au/legis/act/consol_act/dra1994253/" target="_blank">ACT</a> – have similar laws for couples, which might apply to family arrangements. However, the NSW legislation is broader, which makes things worse for parents outside NSW.
When a dispute arises, the parties usually want to resolve the matter as quickly and as cheaply as possible. But court cases can take a year or more to get to hearing. Affidavits must be prepared and financial documents reviewed. During this time the parent may be living in emergency housing, often at public expense.
The picture gets worse if the child’s marriage breaks down. The parent’s claim then gets taken into family property proceedings between the child and their spouse in the Family Court or Federal Circuit Court. This can take even longer than going to the Supreme Court.
A better way to resolve disputes
Parties to these disputes need fast access to a system of practical rules for separating the parties’ property interests, and one that offers early mediation. These rules would cover factors such as increases in the value of the property, how long the parties lived together, what benefits they received, and other discretionary considerations. Such rules might provide the basis for a set of statutory guidelines for a tribunal to apply.
Civil and administrative tribunals <a href="http://www.ncat.nsw.gov.au/Pages/going_to_the_tribunal/going_to_the_tribunal.aspx" target="_blank">emphasise informality and conciliation</a>, so giving these tribunals jurisdiction to resolve granny flat disputes according to statutory guidelines would arguably be more efficient than going to the Supreme Court or Family Court.
Parties really should seek legal advice on granny flat arrangements before they commit to the deal. But parents often trust their children and are optimistic that they can live together as a family. If a lawyer provides advice to an elderly parent individually and with an awareness of their client’s possible incapacity or vulnerability to undue influence, that gives all parties a chance to decide what they want to happen if the relationship breaks down.
Centrelink <a href="https://www.smh.com.au/money/how-to-give-property-to-your-kids-and-keep-the-age-pension-20151118-gl1ypg" target="_blank">recognises granny flat arrangements</a>, so parents’ contributions are not automatically <a href="https://www.humanservices.gov.au/individuals/enablers/gifting" target="_blank">treated as a gift</a>. Gifting attracts an asset test under which the parent might be deemed still to have the funds contributed, which could reduce their pension.
The children can also be worse off if the Tax Office considers that the child accepting the contribution made a capital gain because the parents’ contribution increased the value of the home.
Although the Australian Law Reform Commission has <a href="https://www.alrc.gov.au/publications/elder-abuse-report" target="_blank">looked at some aspects of this issue</a>, action is need to reduce the complexity of existing equitable and statutory rules. Elderly parents should not have to take their children to court in expensive legal proceedings to retrieve the contribution that was meant to ensure they had a secure home in their later years.
Patricia Lane, Senior Lecturer, University of Sydney
This article is republished from <a href="http://theconversation.com" target="_blank">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/when-granny-flats-go-wrong-perils-for-parents-highlight-need-for-law-reform-103335" target="_blank">original article</a>.
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