By: Harcourts Advantage
When you think of South Africa, your first thought might be of a nation experiencing economic and political unrest. However, the country’s urban middle class across the metros continues to grow and expand, creating a need for new houses, shopping centres and office blocks. This means that real estate often remains an attractive opportunity for those looking to invest.
Deciding to invest in residential property, with the aim to rent, can be tricky and requires you to stay informed. For one, many taxpayers who are earning rental income from a second property don’t realise the requirements around declaring this income to SARS. Owning and renting out a property is similar to running a small business and extra income earned from the rental is taxable.
According to SARS, residential accommodation includes the following:
– Holiday homes
– Renting a section of your home
– Dwelling houses and other similar small residential dwellings
Essentially, any rental income received should be added to other income you may earn. As with other sources of income, you must keep accurate records of the income and expenses and original source documents with clear distinctions between capital and trade expenses of your investment property for SARS. It is also important to remain informed on the treatment of any resulting tax losses from this trade, as SARS may ring-fence this loss and not offset this from other income.
Rental property owners should note that certain expenses incurred in the letting of the property can be deducted from the gross rental which reduces the amount of tax payable. These include:
– Rates and taxes
– Bond interest
– Agency fees of estate agents
– Homeowners insurance
– Garden services
– Security and property levies
– Repairs and maintenance
Landlords claiming these expenses need to keep record of such expenses as proof (in the form of invoices, receipts and statements) and it’s wise to fill out any supporting documents from SARS sooner rather than later in the year, as any resulting tax shortfall should be settled by the end of September following the year end to avoid interest being charged. Be vigilant on maintaining clear record of repairs and maintenance as this is a particular focus area for SARS, who are often in pursuit of private or capital expenditure.
Property buyers can and should investigate different investment options when considering tax liabilities for renting. For example, investors can choose to buy a property in their own name, have ownership by means of a trust or ownership through a company. Each of these options has different total effective tax rates and taxes applicable.
Should the time come where a landlord wants to sell their rental property, they will be liable for capital gains tax on any profit made from the sale. The cost of any capital improvements can be added to the original or base cost of the property to reduce the taxable portion of the profit. In this regard keeping record of expenses until eventual disposal is especially important, meaning retaining these beyond a typical 5 year record retention period.
In South Africa, the buy-to-let strategy is one of the easiest ways to invest in a property and a sound investment choice where the many benefits outweigh the shortfalls. In this instance, tenants essentially contribute or cover your mortgage payments, thus paying towards your asset for you. Consider important factors such as the type of property and property location as these determine the kind of return you will see. Work with your agent to determine your investment selection criteria and this will assist in sourcing opportunities for your consideration. This would include quantitative and qualitative factors for the agent to present to you. It can be simple to avoid falling prey to any tax-related complications by staying informed, doing your research before buying a property and keeping your records up to date. While property types come with their various advantages and disadvantages, residential real estate remains sturdy in many areas of South Africa and recent years have even seen the country attract more foreign direct investment into property. We are happy to assist with any of your property needs at Harcourts.