Investing in property in South Africa comes with various tax implications, but there are ways to pay less tax on your investment. This is a basic overview of options to consider and get out more from your portfolio.
When purchasing property, there are numerous ways to go about it. The property can be in your name, in that of a trust, or a company. It is important to understand the tax implications when selecting an entity.
Despite this not being the ideal way to build a property portfolio, it is worthwhile to keep in mind that when purchasing a property to live in, it is beneficial to do it in your name. This incurs the lowest transfer duty, Capital Gains Tax (CGT) is only payable on sales above R1.5m, and the investment does not have to be audited. Trusts on the other hand have the benefit that in the passing of an individual, the property will not form part of the estate. Donation taxes and high CGT apply to trusts though. Companies pay high CGT, a flat rate on transfer duties, and have to pay income tax too.
Rental income derived from your investment properties is payable after expenses are deducted, and through this, you can also pay less tax. Expenses include property management fees, bond interest, security and property levies charged by body corporates, municipal rates and taxes, repairs and maintenance, and even insurance premiums for the building. Garden services, fees associated with advertising the property, and fees payable to agencies or estate agents are also deductible as an expense. It is important to keep accurate accounting records on all of this.
Being married can have tax benefits when it comes to rental income derived from your property portfolio, but only if the couple is married in community of property. In this case, tax on rental income will be split equally, which results in a much lower tax percentage. For example, if the profit after expenses comes to R30 000, instead of paying 26% on this amount, each individual will pay the tax percentage of R15 000 instead.
When purchasing a commercial property, there are several tax-saving tricks. One way is to purchase the property in your name as opposed to the company name. Companies pay 22.4% Capital Gains Tax while individuals and special trusts are only taxed at 18%. By lending the money to the company to purchase the property, and then getting rid of the property later on by selling shares and claims, you can get much more back.
Purchasing numerous properties to rent out will offer tax benefits as investors are rewarded for providing low-cost housing under Section 13Sex of the Income Tax Act. The unit must be new or unused, the owner may not live in the property and you need to own at least five residential units. For every five purchased, SARS allows a minimum of 55% of the purchase cost as a tax deduction.
It is always best to consult with a professional and do your homework properly before making a final decision when it comes to property investments.
Rene de Klerk, Independent Investigative Journalist