There is an age old saying that states - in life there are two things you can’t escape – death and taxes. While scientific development hasn’t yet found the secret to living forever, there are ways of investing your money so that your tax returns work in your favour.
While taxes can’t be escaped entirely, the money owed to the South African Revenue Service (SARS) can be decreased through wise investment and managed expenditure. Purchasing property to rent is the type of investment that can generate income, grow capital and can potentially decrease your dues paid to SARS.
The benefit of owning an investment property, whether it be in an individual capacity, as a company or in a trust, 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 claimed, if required to do so. Furthermore, the rental income should be added to any other taxable income the owner 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.
“Investing in property in a good area where there is a high demand for rental homes, will go a long way in making tax returns work in your favour. Whether investing in property for long term leasing or you’re wanting to let out a holiday flat short term in a high tourist area, do your research and capitalize on something that fits with your financial capacity,” says Craig Hutchison, CEO Engel & Völkers Southern Africa.
In terms of a residential property that is buy-to-let, the following expenses are deductible:
- Rental agent’s commission or fees for securing a tenant.
- Advertising costs of marketing the property.
- Levies, municipal rates, insurance fees, water and electricity.
- Interest paid on the home loan if applicable.
- Cleaning costs, garden service and security.
- Repairs and maintenance costs (excluding improvements to the property – this would be deducted from capital gains tax).
“As a landlord, deducting the non-capital expenses from your tax return will reduce your taxable income. However, before embarking on your landlord journey, it is advisable to chat to a professional real estate company, your accountant, a financial advisor or a tax specialist so that you fully understand both the financial implications and tax benefits.”
“The start of the new financial year is akin to spring, a time to clean up, make new plans, new investments and sharpen your financial acumen for the year ahead. It is also a good time to find that perfect buy to rent property,” concludes Hutchison.