Property investments & tax deductions

The annual tax season for the period 1 March 2013 to 28 February 2014 has recently closed and once your IRP5 has been submitted, you wait for SARS’ decision as to whether you need to pay in or will receive a refund. 

Submitting your income to SARS could generate a positive cash flow,however, in order to benefit from tax deductions, the ideal situation would be to invest in property.

Either way, it is time to reflect on the coming financial year-end, 28 February 2015, and to start planning on how to best focus on your financial growth, says Craig Hutchison, CEO of Engel & Völkers Southern Africa. "Submitting your income to SARS could generate a positive cash flow, however, in order to benefit from tax deductions, the ideal situation would be to invest in property." 

He says having a successful property portfolio will increase your net worth and is possibly the best investment you could consider. 

One positive benefit of buying property with the intention of generating a rental income is that it will not only cover your bond but will also allow you to claim for certain expenses you may incur on the property. 

Consult a tax advisor to ensure your specific situation is given the correct legal guidance, says Hutchison. 

He notes that according to Johan Swart, tax manager at Legal & Tax, SARS should allow the following deductions against the rental income received:  

1. If your property is bonded, the portion of interest paid on the dwelling, in relation to the property.


2. You can claim depreciation on the furniture and appliances, but it is a minimal 15 percent per annum, at the depreciated value.


3. Renovation costs are not as straightforward.  If the renovations were improvements, for example, new cupboards and tiles were fitted to a kitchen, it would not be tax deductable against rental income received, but would be capital in nature. A Record of these costs must then be kept to be taken into account against any capital gain should the property be sold. If the renovations were new paint, replacement of old carpets etc, it would be maintenance and repairs, and would be deductible against the rental income received.


4. As a summary, rental income is taxed at specific rates and those expenses actually incurred, that can be deducted from SARS, would be:
    

         4.1 Levies

         4.2 Rates & Taxes

         4.3 Interest payments on bond

         4.4 Insurance premiums

         4.5 Agent's commission

         4.6 Repairs and maintenance costs

         4.7 Collector's income

         4.8 Bank charges  

All income must be declared to SARS, therefore the total rental you receive must be included on your annual tax return. If SARS finds out about additional income, by means other than a declaration by the taxpayer, this will lead to additional penalties over and above the normal tax payable. 

Hutchison saysAbsa promotes their Buy-to-Let Home Loan by stating that with Absa as your property investment partner, you will enjoy access to a customisable Buy-to-Let Home Loan that can be tailored to suit your specific investment needs, together with competitive interest rate options and flexible repayment terms. 

Available to non-South African residents as well, the Absa Buy-to-Let Home Loan can be registered in the name of legal entities such as companies and trusts, as well as individuals. "There is no need for a proven rental on new property, the rental income will be deemed to be one percent of the property value or purchase price." 

Hutchison  says aBuy-to-Let Home Loan could be the right choice if you: 

1. Want to acquire residential property with a view to rent it out
    
2. Would like to use all or part of the rental income to cover your monthly repayments
    
3. Would like discounts on attorney conveyancing costs
    
4. Would like a choice of repayment terms of up to 30 years (with the option of reverting to 20 years at any time)
    
5. Fixed or variable interest rate options
 

Hutchison says before buying your second home ensure that you’re assured of maximising your money's potential. "Be clear on what your objective and budget is, understand there is a risk, and be involved with the management of the whole rental process."  

Nobody else will look after your money as you do, he says. 

It is thus advisable to work through an established international real estate company, as they are able to provide you with numerous property choices to suit your requirements, says Hutchison. 

"You can then enjoy a future with an enviable property portfolio."