What our analysis shows
Analysis by Granny Flat Numbers, data as of 23 October 2026
- In our worked example (a $1.2 million home sold for $2 million after 10 years, a 60 m² flat beside a 200 m² house), renting the flat for 8 of the 10 years makes about $147,700 of the gain taxable. After the 50% discount, the tax at a 39% marginal rate is about $28,800.
- Rented for two years instead of eight, the same sale attracts about $7,200. The taxable share scales with floor area and time, so a flat used by family for most of its life costs little at sale.
- The market value rule can cut the bill: if you lived in the home first and only then started renting the flat, the cost base resets to the home's value when renting began. If the flat in our example was first rented five years before sale, when the home was worth $1.65 million, the flat's taxable gain is about $80,800 before the discount, against $92,300 measured from the purchase price.
- Two policy changes matter: a CGT exemption for formal granny flat arrangements from 1 July 2021, and a proposal in the May 2026 Budget to replace the 50% discount with indexation and a 30% minimum tax from 1 July 2027.
Tax at sale by years the flat was rented (worked example)
- Rented 8 of 10 years$28,800
- Rented 5 of 10 years$18,000
- Rented 2 of 10 years$7,200
Gain $800,000; flat 23% of floor area; 50% discount; 39% marginal rate incl. Medicare levy. Illustration only; capital works deductions claimed and costs of sale also change the result.
How the taxable part is worked out
The main residence exemption is reduced when part of the home is used to produce income. For a rented granny flat the usual approach is to apportion by floor area and by time: the flat's share of the total floor area, multiplied by the share of your ownership during which it was rented. The 50% discount then applies if you held the property for more than 12 months.
Two things move the result. Capital works deductions you claimed on the flat's construction reduce its cost base, so they come back as gain at sale. And the costs of building the flat form part of the cost base, which reduces the gain.
Worked example
| Years the flat was rented | Taxable part of the gain | After 50% discount | Tax at 39% |
|---|---|---|---|
| 8 of 10 | $147,700 | $73,800 | $28,800 |
| 5 of 10 | $92,300 | $46,200 | $18,000 |
| 2 of 10 | $36,900 | $18,500 | $7,200 |
Bought for $1,200,000, sold for $2,000,000 after 10 years. Flat 60 m², house 200 m², so the flat is 23% of the floor area. We left out costs of sale, the flat's build cost in the cost base and capital works deductions, which partly offset each other.
Set the tax against what the flat earned. In our yield calculator, a Sydney flat earns about $20,000 a year after tax, so eight years of rent comes to well over ten times the tax at sale in this example.
The market value rule
If the home was your residence first and you started renting the flat later (after 20 August 1996), you are treated as having acquired the home at its market value when it was first used to produce income. Only the gain after that date counts. Say the example home was worth $1,650,000 when the flat was first rented, 5 years before sale: the flat's share of the gain from then is about $80,800 before the discount, against $92,300 if the gain were measured from the $1,200,000 purchase price and apportioned by time. Get a valuation at the time you first rent the flat; it is much harder to prove years later.
Family use and granny flat arrangements
A flat used by family without rent is part of your home for tax purposes, and the main residence exemption is unaffected. A formal granny flat arrangement goes further: from 1 July 2021, creating, varying or ending a written, binding, non-commercial agreement that gives an older person or a person with a disability a right to live in the property for life is exempt from capital gains tax. It typically applies when a parent pays money or transfers their house in exchange for that right. The ATO sets out the conditions: ATO: granny flat arrangements. Centrelink has its own rules for the same arrangement; see a granny flat for your parents.
The 2027 change
The May 2026 Budget proposed that, from 1 July 2027, the 50% discount be replaced by indexation of the cost base and a 30% minimum tax on net capital gains for individuals, trusts and partnerships, with the existing discount kept for assets acquired before that date and options for new residential dwellings. The bill was introduced in mid-2026 and was not yet law when we checked. If it passes, the taxable part of a granny flat property's gain will be taxed differently depending on when you bought it; check the final rules before you plan a sale.
This week's worked example
Week of 19 October 2026. A new example, rule and owner report every Monday.
A 65 m² two-bedroom flat with a standard finish on a block with some slope, services 12 m from the house, in Ipswich: our model puts it at $225,000 turnkey ($198,000–$252,000), or $3,460 per m². At the area's median 2-bedroom bond rent of $500 a week it would return 9.1% net and pay back in 14.3 years after tax.
Rule check: The May 2026 Budget proposed replacing the 50% CGT discount with cost-base indexation and a 30% minimum tax from 1 July 2027; the bill was before Parliament when we last checked.
From an owner (NSW, 2025): A family planning for a 77-year-old mother to downsize into a granny flat behind her own house struggled with how to protect the son's contribution, the siblings' inheritance and the pension at once.
Questions people ask
Do I pay capital gains tax if I rent out my granny flat?
Usually on part of the gain when you sell: the share of the property used to produce income (often worked out by floor area) for the time it was rented. The rest of your home stays exempt.
Is there a capital gains tax exemption for granny flats?
Yes, for formal granny flat arrangements from 1 July 2021: a written, binding, non-commercial agreement giving an older person or a person with a disability a right to live in the property for life. The exemption covers creating, varying or ending that arrangement, not renting to tenants.
Does a granny flat for family affect capital gains tax?
Not if no rent is charged and the flat is used by your household or family as part of your home. The partial loss of the main residence exemption comes from income-producing use.