In order to get ready for tax season, taxpayers can start collecting all of the supporting documentation they’ll need to file their returns. When considering the income tax implications of residential properties, the first thing to keep in mind is the difference between primary residences and buy-to-let residential properties:
Primary residences are occupied by the owner of the property and there is therefore no taxable income that is generated from the ownership of the property. All the costs that are incurred in relation to the property are therefore of a personal nature and cannot be deducted for income tax purposes.
Rental properties are leased by a tenant and the owner of the property (the lessor) receives a monthly rental income in return for leasing the property. The rent income must be included in the taxable income of the property owner regardless of whether the property owner is an individual, corporate entity or a trust. All the costs that are incurred in order to generate a monthly rental income can be deducted from the income that the property owner receives when calculating the owner’s taxable income for tax assessment purposes.
Rental of residential accommodation includes:
- holiday homes
- bed-and-breakfast establishments
- sub-renting part of your house e.g. a room or a garden flat
- dwelling houses and
- other similar residential dwellings
The key benefit of buying an investment property is that all costs are deducted from rental income before taxes are assessed. Property management fees, municipal rates, body corporate levies, repairs and maintenance, insurance premiums, and municipal service costs are some of the costs that the property owner is responsible for. As a result, proper accounting records must be maintained in order to provide SARS with supporting documentation for deductions reported for income tax purposes if necessary.
How is tax calculated on rental income?
You can add your rental income to every other taxable income you have. Income tax applies on the percentage charged to you in addition to the monthly rental. These extra amounts, also known as lease fees, are normally paid in lump sums at the outset of the lease, and the entire amount is taxed in the year in which it accrues or is earned. A refundable deposit paid by a tenant is not taxable if it is held separately in a trust account and not used by you, but it is taxable if it is forfeited by the tenant.
Can the taxable amount on rental income be reduced?
Yes, since you might have incurred costs when the property was rented, the taxable sum (rental income) may be diminished. Only costs incurred in the development of rental income are liable for reimbursement. Any capital and/or personal expenses will not be deductible.
Which expenses are allowed?
Expenses that may be deducted from taxable income include:
- rates and taxes
- bond interest
- agency fees of estate agents
- insurance (only homeowners not household contents)
- garden services
- repairs in respect of the area let and
- security and property levies
Which expenses are not allowed?
Maintenance and maintenance are distinct costs that should not be confused with improvement costs. The above is a capital expenditure that will be factored into the property’s base cost in order to minimize the capital gain (or loss) on its sale for capital gains tax purposes.
When it comes to VAT expense claims, the supply of residential accommodation by means of a “dwelling” is an exempt supply for VAT purposes, and you can’t deduct VAT incurred on its expenses. However, if the “dwelling” is used to earn rental income through the supply of “commercial accommodation” (such as hotels, B&B’s and lodges), the owner will be entitled to a VAT expense claim in terms of specific rules as stipulated within the Act, if they are a registered Vat vendor.
What if the expenses exceed the rental income?
If the costs surpass the rental revenue, the loss can be offset against other income gained by the landlord, as long as losses are not “ring-fenced” under existing anti-avoidance provisions. The homeowner must effectively be able to satisfy SARS that he is carrying on a bona fide trade through the rental of his property.
Is it possible for a lessor to apply for special allowances under such circumstances? Yeah, indeed. When renting out a house, a lessor may be eligible for specific deductions that they can subtract from the rental income they receive.
5 residential unit allowance
The taxpayer would be able to seek a deduction of 5% of the purchase price if the lessor owns at least 5 new and unused residential properties in South Africa. It is important to meet with a tax expert before entering into any deal, whether it is a purchase, selling, or the start of a lease, to ensure that the tax affairs are handled correctly.
Buying a house or investing in real estate can be both emotionally and financially satisfying. However, without clear details about which taxes are due and how much they will cost, buyers can find themselves in trouble with the Receiver of Revenue and deep in debt. Rental revenue can be counted in taxable income for the whole tax year. Land owners who are found evading taxes could face hefty fines or even imprisonment.
Here is a checklist of documents to be kept on file for tax season (for an entire year or part off where applicable)
- Monthly Rates & Taxes statements
- Monthly Bank Statement of home loan
- Levy’s or HOA statements
- Homeowners insurance
- Any utility bills included in the rental income
- Advertising invoices or agency fees statements
- Slips and invoices for any repairs done (example geyser bursting)
- Garden services or any other services necessary to make the home rentable
If you need help with the management of your property investment, contact Fitzanne Estates today!
More about Fitzanne Estates
Fitzanne Estates (Pty) Ltd is a Property Management Company who can sufficiently administer your property investment to the benefit of the Landlord, the Body Corporate and the NPC – Non Profit Company. Services include Letting, Sectional Title Management, Full Title Management (NPC – Non Profit Company) and Sales.
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