It is that time of year again where all income from property investments must be declared to SARS and is subject to income tax, this includes all rental income. In preparation for tax season, taxpayers can start gathering all the supporting documents that are needed to submit their tax returns. The first important point to note when reviewing the income tax implications of residential properties is the difference between; the income tax of 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 important factor with owning an investment property is that 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 that are claimed for income tax purposes if required to do so”, says Craig Hutchison, CEO Engel & Völkers Southern Africa.
How is tax calculated on rental income?
The rental income you get should be added to any other taxable income you may have. Any amount paid to you in addition to the monthly rental is also subject to income tax. These additional amounts or lease premiums are usually paid in the form of lump sums at the start of the lease and the full amount is subject to tax in the year that it accrues or is received. 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 but if it is forfeited by the tenant then it’s taxable.
Can the taxable amount be reduced?
Yes, the taxable amount (rental income) may be reduced as you may incur expenses during the period that the property was let. Only expenses incurred in the production of that rental income can be claimed. Any capital and/or private expenses won’t be allowed as a deduction.
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?
According to Alvin van Staden, Director/CA(SA) at The Consulting Services Hub (TCSH), maintenance and repairs should be noted as specific costs and should not be confused with improvement costs. The latter is a capital expense that would be included in the base cost of the property, to effectively reduce the capital gain (or loss) on the disposal of the property, 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?
Should the expenses exceed the rental income, the loss should be available to be off-set against other income earned by the homeowner, provided that losses are not “ring-fenced” in terms of prevailing anti-avoidance provisions. For more information, see our Guide on ring-fencing of assessed losses arising from trade conducted by individuals. The homeowner must effectively be able to satisfy SARS that he is carrying on a bona fide trade through the rental of his property.
In certain circumstances can a lessor qualify for specific allowances?
Yes. Tertius Troost, Tax consultant at Mazars South Africa explains that in certain circumstances a lessor could qualify for specific allowances when letting out a property, which the lessor may deduct from the rental income they earn from the property.
Urban Development Zone (UDZ) allowance
If the property is located in an UDZ, the lessor will be able to claim a certain allowances. These allowances are dependent on the nature of the building. Of critical importance is that the lessor will need to obtain a certificate from the developer or municipality stating that the property is in an UDZ.
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