How much rental income is taxable in South Africa? I get this question often. There are ways to minimise your tax footprint in the property investment sphere. Tax breaks, deductible rental property expenses (including bank interest) and using the right legal structures can minimise your tax footprint.
Let’s start with the basics, and then look at tax breaks and rental property tax deductions.
What is Rental Income?
Rental income is the revenue generated from leasing out property you own. It includes the regular payments received from tenants and any additional fees related to the rental property, such as charges for lease renewals and parking spots.
How is Rental Income Taxed?
The tax of rental income varies based on how the property is owned:
- Individual Owners: Rental income is added to your total income and taxed according to personal income tax rates, which range from 18% to 45%, depending on your income bracket.
- Companies: Rental income is taxed at a flat rate of 27%.
- Trusts: Rental income is taxed at a flat rate of 45%.
To calculate the tax of rental income, you subtract allowable rental expenses from your total rental income. The resulting profit is subject to the applicable tax rate.
What Rental Expenses Can I Deduct from Rental Income?
Several rental expenses can be deducted to reduce your taxable rental income. These include:
- Advertising Costs: Expenses for advertising your rental property, including online listings and print ads.
- Home Loan Interest: The interest portion of your home loan payments and bank fees. You can ask your bank for a tax certificate.
- Insurance Premiums: Building insurance premiums paid by the landlord. Note that life insurance isn’t included as deductible.
- Garden Services and Maintenance: Costs for maintaining the garden and general property upkeep.
- Property Levies and Municipal Charges: Levies for sectional title developments or homeowners’ associations, and municipal rates and property taxes.
- Rental Agent Commission: Fees paid to rental agents for finding tenants or managing the property.
- Security Costs: Monthly fees for security services, such as alarm systems and armed response.
How can I pay less taxes on my rental income?
SARS does have certain tax breaks and ways to minimise the tax you need to pay on rental property. Here are some strategies:
- Depreciation for Investment Property: Claim depreciation on assets like furniture and solar power systems. Depreciation helps account for wear and tear, reducing your taxable rental income and easing the overall rental income income tax. This is much easier if the property is in a company.
- Keep Accurate Records: Maintain detailed records of all rental income and rental expenses. This ensures you can support your deductions and comply with tax regulations.
- Utilise Tax Breaks: Explore available tax breaks, such as those under Section 13 sex, which offer significant deductions for landlords with multiple properties.
- Plan for Capital Gains Tax: If you plan to sell your rental property, consider the impact of capital gains tax. Investing in property improvements can reduce CGT when you sell.
- Evaluate Legal Structures: Using structures like companies or trusts for property ownership can offer tax benefits. These structures also come with administrative requirements and costs, so careful planning is needed.
Using property tax breaks to pay less tax
Property tax breaks in South Africa allows you to deduct up to 100% of your property value from tax over a period of 20 years. Using the Section 13 sex tax break, allows a person with 5 or more properties to do just that. However, if you decide to sell the property before the 20 years, you will need to pay all of the tax breaks back. This is called a clawback.
There are different property tax breaks, such as Section 13quin and Section 13quat that you can use to pay even less tax. I highly recommend that you speak to a property tax specialist before embarking on your tax break journey.
It is recommended to work with a tax professional familiar with property tax laws. They can provide expert advice and help you maximise your rental property tax deductions.
Distinguishing Between Repairs and Renovations
Repairs and renovations and renovations are taxed differently:
- Repairs: Expenses that restore the property to its original condition, such as fixing leaks or repainting, are deductible as rental expenses. Repairs are deducted from your pay-as-you-earn (or annual filings of company tax).
- Renovations: Enhancements that improve the property’s value or extend its lifespan, such as adding a new kitchen or upgrading the bathroom, are not immediately deductible. They increase the property’s base cost, which can reduce capital gains tax when the property is sold. Rennovations are deductible when you sell the property – which means you’ll pay less capital gains tax (CGT).
How can I pay less taxes when selling my rental property?
If any renovations were done, then this will be deducted from the proceeds.
Bond and transfer fees are not deductible from your annual expenses. It is however deductible from the proceeds when selling, meaning you will pay less capital gains tax. TaxTim has a Capital Gains Tax Calculator you can use.
Examples of Rental Income Tax Deductions
Here are examples illustrating how to apply these deductions:
- Furniture Depreciation: Purchase R20,000 worth of furniture for your rental property and depreciate it over five years. You can claim R4,000 annually as a tax deduction.
- Home Loan Interest: Pay R100,000 in home loan interest over the year. This amount is deductible from your rental income, reducing your taxable rental income.
- Garden Services: Spend R12,000 annually on garden maintenance. This cost is deductible, lowering your taxable rental income.
- Rental Agent Commission: Pay R10,000 to a rental agent for managing your property. This amount is deductible from your taxable rental income.
Should I buy my property in a company, trust or my own name?
There is a great advantage of buying property under company name in South Africa. For example, if you create a holding company for your properties, you can lend it money to buy the property. As it needs to legally pay you back with interest, you can get your money back over time through the rental income, without breaking the tax bank.
If you want to grow your property portfolio and not use the income, you might want to explore a company structure. Keeping the income in the company can mean less tax payable, and will allow you to grow your investment at a lower tax rate. At a later stage, you can either sell the company with all the properties or decide to start invoicing the company for work done on managing the properties.
Note that legal structures such as trusts and companies affect the legacy that you’re leaving, your tax, and liability and could increase your expenses substantially. If you don’t know what you’re doing, you can be hit by a massive tax bill that could ruin you financially. It can however be very profitable if done correctly.
Please consult a property expert to get the right structure in place for you.
Conclusion
Paying less tax on a rental property is possible in South Africa. There are tax breaks and legal structures that allow you to pay less tax. If you declare all your income and expenses, you can also cut your tax bill substantially.
Always declare all your income and expenses – don’t under-declare and be honest.
Happy investing!
