If you plan to rent your granny flat for passive rental income consider creating an LLC around your rental. This allows you to deduct any expenses you incur including the construction of your unit. An LLC will limit your personal responsibility and damages that can be awarded to the tenant in court. They are also relatively easy to manage and create an LLC is created much faster than other business models.
When you file taxes, you do so normally. This is a great benefit to having the protection of a business, but get taxed at an individual rate. Benefits of setting your rental up as a business: - Limited liability - Protection if your insurance fails to safeguard all situations. - The ability for more tax write - offs. - Fewer regulations than a sole proprietorship or corporation. - Taxation at the individual level, as opposed to double taxation for other business types.