Could Granny Flats Become a Bigger Focus for Property Investors After the 2027 Tax Changes?

A granny flat is a smaller home built on the same block as an existing house. It can be attached to the main property or built as a separate dwelling, depending on the land and local planning rules.

Some people build them for family members. Others build them to create an additional source of rental income.

For property investors, the appeal is straightforward. If you already own a suitable block, you can add another dwelling without buying an entirely separate property.

But the tax changes coming in July 2027 are likely to make some investors pay closer attention to new construction, including granny flats.

That does not make every property with room for a second dwelling a good investment. Construction costs, planning requirements, finance and ongoing management still need to be assessed.

The changes will influence how some investors compare established properties with new construction.

What is changing in 2027?

From 1 July 2027, negative gearing for residential property is proposed to be limited to eligible new builds.

Under the current system, an investor who makes a rental loss can generally use that loss to reduce other taxable income, such as salary or business income.

Under the proposed changes, losses from affected properties will generally need to be used against residential property income or capital gains, with unused amounts carried forward. Properties bought before the announcement time are grandfathered, and eligible new builds remain outside the restriction.

The exact application will depend on the legislation and the investor’s circumstances.

An investor comparing an established house with a property that includes a newly built dwelling will need to consider the tax treatment alongside the purchase price, rental income and expected costs.

A granny flat belongs in that discussion, particularly for someone who already owns a suitable block.

Why a granny flat might get more attention

Imagine an investor owns an established house on a large block. There may be enough space at the back for a second dwelling, subject to planning approval, access, services and the relevant state or local rules.

Instead of buying another established property, the investor can investigate whether building a granny flat makes financial sense.

The tax treatment will be one part of that decision, but it should not be the starting point.

The additional rental income, construction costs and value of the finished property all need to be assessed.

I would not assume that every granny flat automatically qualifies as an eligible new build under the proposed rules. The details of the project and the final legislation will determine the treatment, so an investor needs to confirm this with their accountant before proceeding.

Building another dwelling is not cheap

It is easy to focus on the additional rent a granny flat could generate. But rent is only one part of the calculation.

The investor needs to account for design, approvals, site preparation, construction, service connections, landscaping and any changes required to the existing property.

The block might look suitable from the street, but that does not mean the project will be straightforward.

The position of the existing house matters. So does the driveway, the slope of the land, drainage, access to services and the space available for construction.

A difficult building site can push costs up quickly.

The finished granny flat also needs to appeal to tenants. A property with poor privacy, limited parking or an awkward entrance will be harder to rent than a well-designed dwelling in the same area.

The additional income needs to justify the money being spent.

The rental income still needs to work

A second dwelling can increase the total rent collected from a property, but it also creates additional responsibilities.

There may be more maintenance, separate utility arrangements, insurance considerations and work involved in managing tenants.

The type of tenant you attract will depend on the location and design of the granny flat.

A well-located dwelling with practical living space, privacy and access to local services will have a stronger rental position than one built simply because there was room available.

I would also look at the existing house. If the main property is in a poor location or has limited appeal, adding a granny flat will not fix those problems.

The entire investment still needs to work.

The block must be suitable first

Planning rules differ between states and councils. Requirements can include minimum dimensions, setbacks, private open space, parking, access and restrictions on how the dwelling can be used.

There may also be limits on the size of the granny flat or requirements relating to the existing house.

This is why I would not treat a large backyard as proof of development potential.

A property with a smaller but practical block can be easier to work with than a larger block with difficult access, an unusual shape or significant site constraints.

The land needs to support the project before the numbers can be properly assessed.

More interest in new builds does not mean every project works

The proposed tax changes are intended to direct investment towards new housing supply.

That direction will lead some investors to investigate new construction, including additional dwellings on existing blocks.

But it will not make every granny flat project financially viable.

The decision will still come down to construction costs, rental income, location and the risks involved.

There is also a difference between building a granny flat on land you already own and buying a property specifically to construct one.

If you are paying a higher price for an existing house because you believe you can add a second dwelling, you need to be confident about the approval process and construction costs before paying for that potential.

Otherwise, you could spend more on the property without achieving the result you expected.

What I would look at before buying

If I were assessing a property with room for a granny flat, I would start with the block and the existing house.

I would want to know:

• Is the location suitable for two dwellings?
• Does the block have practical access?
• Is there enough usable space for construction?
• What planning rules apply?
• How much will the complete project cost?
• What rent could the new dwelling realistically achieve?
• Will the finished property appeal to tenants and future buyers?

I would also compare the project with buying an established investment property or a new property that is already finished.

Building is not automatically cheaper or more profitable than buying. The outcome depends on the numbers and the risks involved.

The tax treatment will make a new dwelling more relevant to some investors after 2027, but it should not be the reason to proceed with a project that does not work without it.

What I would focus on

I would look for properties where the land already has practical potential, rather than buying a property solely because an agent says a granny flat could be built.

An established house in a good location, with useful access and enough space for a second dwelling, is where I would start.

The existing property also needs to make sense on its own.

If the granny flat project is delayed, costs more than expected or cannot be approved, the main property still needs to be something I am comfortable owning.

I would also want the rental demand to be clear. A second dwelling is more useful when there are people in the area who actually want to rent that type of accommodation.

The location, layout and quality of the finished dwelling will matter more than simply having another set of rooms on the block.

Final word

The 2027 tax changes will affect how some investors compare established properties with new construction.

A granny flat will be part of that conversation, especially for investors who already own a suitable block and are considering ways to add another dwelling.

But the tax rules will not remove the usual challenges of construction. You still need the right land, the right location, realistic costs and enough rental demand.

I would not buy a property just because there is room to build at the back.

I would first make sure the existing property works, then confirm whether the additional dwelling is possible and whether the finished project makes financial sense.