Are there any tax benefits for property owners in South Africa? What do you need to know when declaring income from property investments to SARS?
This article serves to shed some light on these topics as we take a closer look at tax benefits for property owners.
During tax season and while gathering all the necessary supporting documents for tax return for residential properties, an important point to remember is the difference between income tax of buy to rent and primary residence properties.
A primary residence refers to a property that is occupied by the owner. There is no taxable income that can be generated from this type of property. All costs related to the property of a personal nature and cannot be deducted from tax.
Rental properties are leased and occupied by a tenant. The owner of the property therefore receives a rental income on a monthly basis.
The rental income must be included in the owner’s taxable income whether the owner is a corporate entity, trust or private individual.
Costs incurred in order to generate a monthly income from the rental property is tax deductible.
Rental of residential accommodation includes:
When owning an investment property, all expenses are deductible from the rental income of the property. This is done before tax is calculated.
Included in these costs are:
Therefore, it’s important that formal accounting records are kept in order to issue the necessary and relevant supporting documents to SARS for the deductions claimed for income tax purposes.
Any and all rental income should be added to your other taxable income, including any amount paid in addition to the monthly rental.
These amounts are generally paid as a lump sum at the beginning of the lease and are subject to tax in the same year that they are received.
The deposit paid by the tenant which is subject to refund is not taxable if it’s kept separately in a trust account and not used by the property owner.
However, it becomes taxable if it has been forfeited by the tenant for relevant reasons.
Because you may incur additional expenses during the period of time that you rent your property, the taxable amount on rental income may be reduced.
Private expenses are not allowed to be deducted. However, any expenses that contributed to obtaining the rental income will be allowed as a deduction.
The following are considered deductible expenses:
Maintenance and repairs should be noted as specific costs. Repair and maintenance must not be confused with improvement costs.
Improvement costs are expenses that are included in the base cost of the property. This is in order to reduce the capital gain or capital loss when selling the property for capital gains purposes.
When it comes to VAT claims, providing residential accommodation does not allow for VAT to be deducted.
However, an owner who provides commercial accommodation such as guesthouses, bed & breakfasts as well as hotels is allowed to claim for VAT as long as they are a registered VAT vendor.
In such a case where the expenses exceed the rental income, the loss should be offset against any additional income earned by the owner of the property.
This only applies when certain stipulations in the anti-avoidance act are adhered to. Namely, the losses may not be ring-fenced.
The homeowner will need to provide satisfactory proof to SARS that he is carrying on a genuine trade through the rental of his property.
Under certain circumstances, a lessor may qualify for certain allowances when renting out his property. This may be deducted from the rental income they earn from the property.
Should the property be situated in a UDZ, he will be entitled to claim certain allowances which are dependent on the type or nature of the building.
The most important note to make in this situation is that the lessor will need to obtain a certificate stating that the property is in fact in a UDZ.
This certificated may be obtained from the developer or the relevant municipality.
Should a lessor own a minimum of 5 new and currently unused residential properties in South Africa, the taxpayer will be entitled to claim an allowance of 5% of the purchase price as a tax deduction.
Whether it be a sale, purchase or commencement of lease, it will be in the best interest of the homeowner to consult with a tax specialist when entering into an agreement.
This is to ensure that the affairs related to tax are treated correctly and lawfully.
Generally speaking, investing in a property can be personally and financially beneficial. However, without sound advice and the correct information, buyers of property may land up in debt and in trouble with SARS.
The following documents should always be kept on file for tax season:
In conclusion, all rental income which is earned during the tax year must always be included in the taxable income.
Homeowners who evade tax and get caught will face either a substantial fine or even imprisonment.
We are experts in property law. If you would like more information regarding tax benefits for property owners, including what is allowed or not allowed to be deducted, contact our attorneys today.
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