What our analysis shows
Our calculations, data as of 23 October 2026
- In our example a $1.2 million home, sold for $2 million after 10 years with a 60 m² flat rented for the last eight, leaves about $117,000 of the gain taxable. After the 50% discount, tax at the top-but-one bracket is about $22,800.
- Rented for two years instead of eight, the same sale costs about $5,500 in tax. The taxable share grows with the flat's floor area and with the years it earns rent.
- Starting to rent after you moved in usually helps. The cost base then resets to the property's value at that date, and in our example the tax falls to about $17,300.
- The CGT changes passed in June 2026 apply to sales from 1 July 2027. Gains up to that date keep the 50% discount; later gains are indexed and face a 30% minimum tax.
Tax at sale in our example, by how the gain is measured
- Flat used by family, no rent$0
- Rented 2 of 10 years$5,500
- Rented 8 years, market value rule$17,300
- Rented 8 of 10 years, from purchase$22,800
Flat 23% of floor area; build cost in the cost base, less capital works deductions claimed; 50% discount; 39% marginal rate incl. Medicare levy. Costs of sale left out.
How the taxable part is worked out
When part of a home earns rent, the main residence exemption covers only the private part. The usual way to split a granny flat property is by floor area: the flat's share of all the floor area on the land, multiplied by the share of your ownership during which it was rented. If the tenant has exclusive use of part of the yard, that can be counted too; the ATO accepts any reasonable basis you can support.
The cost base is what you paid for the property, plus buying costs, plus what the flat cost to build, less the capital works deductions you claimed on it. The deductions you took each year come back at sale as a smaller cost base.
Worked example
A house bought in 2016 for $1,200,000. A 60 m² flat built in 2018 for $200,000 beside a 200 m² house, so the flat is 23% of the floor area. Capital works deductions of about $4,250 a year while it is rented. Sold in 2026 for $2,000,000.
| Years rented | Cost base | Whole gain | Taxable part | Tax |
|---|---|---|---|---|
| 8 of 10 | $1,366,000 | $634,000 | $117,000 | $22,800 |
| 5 of 10 | $1,378,800 | $621,300 | $71,700 | $14,000 |
| 2 of 10 | $1,391,500 | $608,500 | $28,100 | $5,500 |
For scale: a Sydney flat earns roughly $20,000 a year after tax in our yield calculator, so eight years of rent is more than five times the tax in the first row.
The market value rule
If the property was your home first and you started renting part of it later, you are treated as having acquired it at its market value on the day it first produced income. The gain before that day is ignored, and so is the time apportionment for those years.
In the example, suppose the property was worth $1,450,000 in 2018 when the flat was first let. The cost base becomes $1,450,000 plus the build cost, less the deductions, and the flat's share of the gain from then is about $88,600, for tax of about $17,300. The rule applies automatically where it fits, so get a valuation when you first rent the flat; proving a 2018 value in 2034 is much harder.
Family use and granny flat arrangements
A flat lived in by family without rent is part of your home, and the main residence exemption is not affected. That is the most common case and needs no paperwork for tax.
A granny flat arrangement is something narrower. Since 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 a property for life does not trigger capital gains tax. It typically covers a parent who transfers their house or pays money for that right. The exemption covers the arrangement itself, not the later sale of the property: that follows the normal rules. The ATO sets out the conditions in its guidance on granny flat arrangements; for the pension side, see a granny flat for your parents.
Sales after 1 July 2027
The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received Royal Assent on 26 June 2026. For CGT events from 1 July 2027, individuals, trusts and partnerships lose the 50% discount on gains that accrue after that date; those gains are indexed for inflation instead, and net capital gains face a minimum tax rate of 30%. Gains accrued up to 1 July 2027 keep the discount. If you will sell a granny flat property after that date, a valuation at 1 July 2027 may make the split easier to prove.
Three common mistakes
- Relying on the six-year rule. It lets you treat a whole home as your main residence while you live elsewhere. It does not cover a flat you rent out while you live in the house.
- Forgetting the deductions. Every dollar of capital works deduction claimed lowers the cost base. Keep the schedule and the yearly claims.
- Calling family use an arrangement. A parent living rent-free in the flat needs no CGT exemption. The 2021 exemption matters only when assets or money change hands for a life right.
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 Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received Royal Assent on 26 June 2026: from 1 July 2027 gains accruing after that date lose the 50% CGT discount and are indexed instead, with a 30% minimum tax.
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.