Author: RachelATO(Community Moderator)Community Moderator 9 Feb 2026
Hi @RandomTandem,
Whether you can claim deductions for rental property expenses depends on how you use the property. If you rent out the main house and live in a granny flat or extension on the same property, you can generally claim deductions for expenses related to the rented portion. This includes interest on money borrowed to build or purchase the rental part of the property.
The rental income you receive is assessable income that you must declare on your tax return. You can claim deductions for expenses associated with earning that rental income, but you need to apportion these expenses correctly. You can only claim the portion of expenses that relates to the part of the property that's rented out and available for rent.
It doesn't matter whether you live in the granny flat and rent the house or live in an extension and rent the house, the principle is the same. You declare the rental income and claim deductions only for the expenses relating to the rented portion.
Keep in mind that renting out part of your property means you won't be entitled to the full main residence exemption from capital gains tax when you sell. You'll need to pay CGT on the portion that was rented out.
For the parts of your loan used for other purposes (like the $10,000 for loan repayments during construction or $5,000 for a car), you can't claim deductions for interest on those amounts because they're not used to earn rental income.
You'll need to read our rental properties guide to understand how to apportion your expenses correctly and what records to keep. We also have information about renting out all or part of your home that covers the key points for your tax return.
Author: JenniferATO(Community Director)Community Director 9 Feb 2026
@RachelATO has given you some great info. Weighing in with an extra two cents.
When it comes to the financial side, I can see you've started some calculations. If you need, a licensed professional - like a financial adviser or planner - could help you weigh up the options based on your specific circumstances. Yes, there'd be a cost involved. But, they can walk you through the numbers, outline the potential risks and benefits, and support you in deciding what's right for you.
Thank you for your very detailed answer! I really appreciate it :)
I have no plans to sell this house anytime soon so I'm not too worried about the CGT. I am curious though. Considering I was gifted the property, and I paid over 20k stamp duty and transfer fees on it's 800k valuation, do you know if the CGT will be on the value gains after 800k?
My future plans/goals are to eventually rent the whole property out once the loan is paid off for the granny-flat or extension. I don't want to live in a granny flat or extension forever and I don't like my area anymore. I plan to move and buy a cheaper house in Gladstone or surrounding areas, and I'll use the $1000+ of weekly passive income to live and pay the future house mortgage. My friend recently bought a bigger and nicer house than mine for 400k in Gladstone (on twice the land too), so I would eventually like to do something similar to him and move away from the overcrowded and expensive Gold Coast.
You mentioned I would be able to claim expenses related to the rented portion, but I need the loan to build a place for me to live so I can rent the house out. Does this mean I can't claim any deductions because I will be taking a loan out to build the extension or granny flat for me to live in? Technically I need a place to live while I rent my house out so it is expenses related to me earning the income, just not directly. Its my understanding by your statement that I won't be able to claim expenses on the loan because it wasn't used for the rented part of the property? Is that right?
Author: NikkiATO(Community Moderator)Community Moderator 10 Feb 2026
Hi @RandomTandem,
For CGT, when a property is received as a gift, the cost base is generally the market value at the time of transfer, plus incidental costs such as stamp duty and transfer fees. Your future capital gain is worked out from the sale price minus that cost base.
As mentioned earlier, interest is only deductible to the extent the borrowing is used for the income‑producing part of the property. If part of the loan is used to build the granny flat or extension you’ll live in, that portion is private and not deductible. Only the part used to build or improve the rented dwelling can be claimed, and all expenses must be apportioned between rented and private areas.
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