Section 13 of the Income Tax Act No. 58 of 1962 – property investment and tax relief

It’s not often that SARS offers tax relief but when it is presented as an option it should be used without delay.

Within Section 13 of the Income Tax Act lies a little gem. This section offers tax advantages for property investors being able to claim millions of rands back from SARS.
Property buyers can leverage Section 13 of the Income Tax Act to obtain tax returns from their buy-to-let property portfolios.
The tax write-offs obtainable through Section 13 come into effect when property investors buy a minimum of five residential units for rental. Purchasers are then able to off-set their investment by depreciating the cost of the units at an accelerated rate of 5% a year over 20 years.
Example: If an investor purchases five new residential units at R1 000 000 each SARS will allow that investor a R2.75 million tax deduction to reduce their tax liability. This equates to an annual tax allowance (for 20 years) of R137,500, taxed at 45% equals R61,875 a year (or effectively R5,156 a month).

Requirements to qualify for the tax incentive:
• The units must be new. No existing or second-hand properties will qualify for the tax incentive.
• The taxpayer may not live in the property as their primary residence.
• The investor must use these units for trading purposes only; i.e. rental of the property.
• The taxpayer must own at least five residential units. These units do not have to be purchased at the same time, although only once the 5th property has been acquired will the tax incentive come into play.
• The units must be in South Africa.

This incentive offers purchasers of residential units to write off a percentage of the cost of buildings acquired after 21 October 2008.
SARS offers an incentive to the investors to purchase properties to supply accommodation and in return give them a percentage back of the purchase price.
There are two different types of properties that SARS will look at in two different ways. The Investor can decide which option will fit their portfolio the best in terms of the Tax Incentive.

  1. Sectional Title – when you own one of these Sectional Title properties, SARS offers you 55% back on the Purchase Price of the property, claimed back over a period of 20 years.
  2. Full Title – this is where you own the building and the land. In this instance, tax payers may only claim on the building portion of the property as the land that it’s built on, does not depreciate. It could add up to 80% of the building cost, depending on the cost of the land, claimed back over a period of 20 years.

Take note of the following:
• Should a property be sold before the 20-year claiming period has expired you will need to refund SARS and a professional Tax Advisor will be able to assist you in terms of the calculations hereto.
• The SARS incentive is used as a deduction on your personal income tax (or the income tax of your Company should the properties be purchased in this entity). SARS is not offering you a cash back, you are simply paying less tax.

All income from property investments, including rental income, must be declared to the South African Revenue Service (SARS) and is subject to income tax.

Rental properties are leased by a tenant, and the owner of the property (the lessor – which could be an individual, company or trust) receives a monthly rental income in return. All the costs incurred in generating the rental income can be deducted when calculating taxable income.

Apart from the long-term rental of an investment property, income-generating residential accommodation includes holiday homes that are let out to guests, bed-and-breakfast establishments, guest-houses, and a room of your house or granny flat that is sub-let.

All expenses are deductible from the rental income, before tax is calculated. These costs typically include property management fees, municipal rates, levies charged by body corporates, repairs and maintenance, insurance premiums and municipal service costs that are paid by the property owner. Proper accounting records therefore need to be kept in order to provide SARS with supporting documents for the deductions claimed, if required to do so.”

The rental income should be added to any other taxable income you may have received. Any amount paid to you in addition to the monthly rental is also subject to income tax.

A refundable deposit paid by a tenant is not taxable provided it is kept separately in a trust account and is not used by you. If it is forfeited by the tenant, then it is taxable.

Expenses that may be deducted include:

Rates and taxes;
Interest on the bond;
Advertisements;
Estate agents’ fees;
Insurance premiums (only home-owners insurance, not household contents);
Garden services;
Repairs and maintenance of the property; and
Security and property levies.

Author Craig Tonkin

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