Tax deductions on rental income

All income from property investments, including rental income, must be declared to the South African Revenue Service (SARS) and is subject to income tax. In preparation for tax season, you can begin gathering all the supporting documents that are needed to submit your tax return. The first important point to note when reviewing the income-tax implications of residential properties is the difference between a primary residence and a buy-to-let residential property.

Which expenses are deductible?

Only expenses incurred in the production of rental income can be claimed as a deduction. Capital and private expenses are not allowed as a deduction.

Expenses that may be deducted include:

  • Rates and taxes;
  • Interest on the bond;
  • Advertisements;
  • Estate agents’ fees;
  • Insurance premiums (only homeowners, not household contents);
  • Garden services;
  • Repairs and maintenance of the property; and
  • Security and property levies.

Which expenses are not allowed?

According to Alvin van Staden, a director at The Consulting Services Hub, maintenance and repairs should be noted as specific costs, and these should not be confused with improvement costs. The latter is a capital expense that would be included in the base cost of the property, to effectively reduce the capital gain (or loss) on the disposal of the property, for capital gains tax purposes.

When it comes to VAT expense claims, residential accommodation is exempt for VAT purposes, so you can’t deduct the VAT incurred on the expenses. However, if the dwelling supplies commercial accommodation (such as a hotel, B&B or lodge), the owner will be entitled to a VAT expense claim in terms of specific rules in the VAT Act, if the owner is a registered VAT vendor.

What if the expenses exceed the rental income?

Should the expenses exceed the rental income, you should be able to offset the loss against other income earned by you, provided that losses are not “ring-fenced” in terms of prevailing anti-avoidance provisions. You must effectively be able to satisfy SARS that you are carrying on a bona fide trade through the rental of your property.

Keep records

Investing in property can be financially rewarding. But without correct information on which taxes are payable and how much, you could find that your purchase landing you in trouble with the Receiver of Revenue and knee-deep in debt. And if caught evading tax, you could face a hefty penalty or imprisonment.

Here is a checklist of documents to be kept on file for tax season (for an entire year or part thereof where applicable):

  • Monthly rates and taxes statements;
  • Monthly home loan statements from the bank;
  • Levy statements;
  • Homeowners insurance schedule;
  • Any utility bills for services included in the rental;
  • Advertising and agency invoices;
  • Slips and invoices for any repairs and maintenance done; and
  • Garden services or any other services necessary to make the home rentable.

Read the full article by Chantalle Bell here: https://www.iol.co.za/personal-finance/tax-deductions-on-rental-income-16616425