The 2020 tax filing season is upon us. When it comes to tax deductions, homeowners are entitled to certain claims if they are working from home. In these cases, the onus falls on the homeowner to prove that a particular amount is deductible, as well as justify the claim by showing the calculation of how he or she arrived at the deduction figure.
“Although many homeowners will qualify for a tax deduction, it is sometimes a difficult task to establish the amount of interest on their bond that is tax-deductible. In certain situations, however simple they may seem at first, there can be complications and queries that could arise. Homeowners should make certain that they know what they are doing, or if in doubt, should consult with a professional tax consultant,” suggests Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa.
To provide homeowners with a simplified overview of what they could potentially claim back, RE/MAX of Southern Africa provides the following example:
Working on a home purchased for R1 million, if you work from home and use 20% of the property as a home office, you will be entitled to a tax-deduction based on the interest charged on the remaining outstanding bond amount. If the interest on the bond is charged at 7%, you will be charged roughly R70,000 in interest for the year. Because 20% of the property is used as a home office, you would be entitled to claim 20% of the R70,000 (R14,000) as a tax deduction in the production of your income.
If you decide to withdraw an amount from your bond (for example, R100 000) to finance personal expenses, you will not be able to take into account the tax amount on the additional money taken, as this is not in the production of income. Any interest charged on the additional R100 000 will be excluded from the calculation of deductible interest from the time taken, going forward for all the years that you carry the bond.
Essentially what this means is that a smaller percentage of the initial 20% of the interest reflected on the bond statement is tax deductible from then onwards. The percentage of deductible interest will continue to change as you make further withdrawals from the bond account for other non-income producing purposes.
On the flip side, if you made a substantial payment on the bond, such as an inheritance payout, for example, you will not have the option to allocate your money to the 80% private portion of the bond and not impact the other 20% regarded as business use. The bond is regarded as one account that cannot be divided or proportioned into separate segments. This means that any money allocated to the bond account will reduce the balance along with the amount of interest owed for the year, which will affect how much you are able to claim back in tax. If you have any other loans that are not tax-deductible, it might be a better option from a tax planning perspective to allocate the inheritance to pay off those loans instead.
In all these scenarios, Goslett warns homeowners that they will only qualify for a home office deduction if they are employed and a condition of the employment is to carry the cost of keeping a home office as the central business location.
“As a homeowner, figuring out tax deductibles can sometimes be a rather overwhelming experience. If there is ever any area of doubt, it is best to consult with a professional financial adviser or tax consultant who can provide assistance and guidance through the process,” Goslett concludes.