Legal Articles

Rental property income tax

SARS requires for you to declare all the income your receive from property investments. These are then subject to income tax and also includes all rental income. 

It is important for taxpayers to have all the supporting documents needed in order to submit their tax returns. 

When reviewing the income tax implications of residential properties it is important to consider the differences between the income tax of primary residences and that of buy to rent properties.

Primary Residences and buy-to-rent properties

In primary residences, the occupation of the property is usually by the owner and thus no income which can be taxed is generated from the ownership of the property. 

Any of the expenses relating to the property are for the owner’s personal use of the property and so they cannot be subtracted for tax purposes. 

Rental Properties

With regards to rental properties, the property is rented to a tenant and the property owner receives rental income on a monthly basis. 

These include, holiday homes, B&B establishments, guesthouses, sub-rental of part of your property such as a room or a garden flat, dwelling houses etc. 

The rental income has to be declared with the taxable income of the property owner. 

All the expenses that come about from generating the monthly rental income can be subtracted from the income that the property owner is paid during the calculation of the taxable income for tax assessment purpose.

Investment Property

If you own an investment property, it is important to remember that before tax is calculated, all of the costs are first subtracted from the rental income. 

They include property management fees, municipal rates, levies, repairs and maintenance costs, insurance premiums and municipal service costs that the property owner has to pay. 

This highlights the importance of keeping accurate record of the accounts so that the owner can provide SARS with the supporting documents for all the deductions that he or she may claim for income tax purposes if necessary. 

How is income tax on rental income calculated?

But the questions that need to be considered when doing this are How is tax on rental income calculated? How can this amount be reduced? Which expenses are and are not allowed?
In a
nswer to the first question, you add the income earned from renting out the property to any of the other taxable income which you have. 

Aside from this the full sum for additional amounts or lease premiums is also taxable in the year that it accrues or is received. 

If the refundable deposit is kept separately in a trust account, then it is not taxed. 

However, if this deposit is forfeited by the tenant as a result of breaching the contract or damage to the property, then it will be taxed.  

Can the taxable amount be reduced?

It is possible to reduce the taxable amount, however, only the costs which accumulate while the property was being rented can be claimed for. 

If the expenses are for anything else, such as capital or private expenses, then the deduction won’t be allowed.

The expenses which are allowed for include rates and taxes, the interest earned from a bond, advertisements, estate agent fees, homeowners insurance, maintenance and repairs to the property, levies and security for the property. 

Expenses not allowed

Expenses which aren’t allowed include improvement costs which will add value to the property. 

This is a capital expense and is thus included in the base cost of the property in order to reduce the capital gain or loss of the property when it is disposed of. 

Also, VAT cannot be claimed as an expense unless the owner is a registered VAT vendor, and if the property is used for commercial purposes such as hotels, B&B’s and lodges.
 
In the event of the expenses exceeding the amounts earned from the rental income, the amount should be off-set with other income sources of the homeowner. 

If the losses are ring-fenced then the provision cannot be utilised. SARS needs to be satisfied by the way the homeowner conducts business with regards the rental of his property.

Allowance benefits  

There are specific allowances which the homeowner can benefit from depending on the circumstances. 

These allowances can be deducted from the rental income which the owner earns from renting the property.

Urban Development Zone allowance 

The Urban Development Zone allowance, for example, allows for the owner to claim allowances if the property is located in an Urban Development Zone. 

However, these allowances depend on the nature of the building, and should the owner wish to avail of this allowance, the he or she will have to obtain a certificate from the developer or municipality which states this fact. 

Documents for safe-keeping

Below are the necessary documents which you should keep records of to help you in preparation for tax season:

• 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.

Van Deventer & Van Deventer Incorporated - Property lawyers Johannesburg

There are many ways to make your income from property more tax efficient. Speak to us for assistance in planning your property tax liabilities.