There are three things you can never get away from – death, taxes and Cher. There are ways to minimise your tax footprint in the property investment sphere. This includes controlling your income and expenses better, using available tax breaks and/or using the right legal structures.
Let’s look at the taxation of rental property and then how to pay less tax.
| Taxable income (R) | Rates of tax (R) |
|---|---|
| 1 – 237 100 | 18% of taxable income |
| 237 101 – 370 500 | 42 678 + 26% of taxable income above 237 100 |
| 370 501 – 512 800 | 77 362 + 31% of taxable income above 370 500 |
| 512 801 – 673 000 | 121 475 + 36% of taxable income above 512 800 |
| 673 001 – 857 900 | 179 147 + 39% of taxable income above 673 000 |
| 857 901 – 1 817 000 | 251 258 + 41% of taxable income above 857 900 |
| 1 817 001 and above | 644 489 + 45% of taxable income above 1 817 000 |
How is rental income taxed?
Rental income is taxed at your normal income tax bracket. This means, if you’re in the 36% bracket, you will be paying 36% income tax on all income made from property rentals.
If you’re earning rental income, it might happen that your extra income might push you into a higher tax bracket. Keep your eye on your income so that you know what you’ll be in for!
Another tax that many forget about, is capital gains tax (CGT) when you sell your property. This is a complicated calculation, but in short, it is generally no more than 20%. TaxTim has an awesome CTG calculator you can use when you need it!
There are ways to pay less tax on rental property. These include leveraging property structures and taking advantage of tax breaks. In general, the way to pay less tax is by lowering your income or/and having more taxable expenses. As people often forget to deduct everything, this article will look into this too.
Before we do, I want to touch on your property strategy and tax.
How does your property investment strategy affect your tax?
Investing in property is a balancing act between liability, tax and income. Generally, you can only pick two. When picking lower taxes, it means you will need to sacrifice either liability or income. If you decide to sacrifice income, you will need to lower your income and have more expenses. If you choose to sacrifice liability, you will not be able to use a trust or company to safeguard your properties against your personal financial woes.
In property, I find there are two types of properties: cash flow and krugerrand properties. Cash flow properties tend to have a higher rental income to property value ratio, whereas Krugerrand properties have a large gap. Krugerrand properties tend to be more expensive. For me, that means R 700k+. As you’ll most likely have a big shortfall, it means you will pay less tax.
How can I pay less taxes on my rental income?
The easiest way to pay less tax is by having less income and more expenses. There are a lot of details in this that people miss, and I would like to elaborate on this here.
Pay less tax by increasing property expenses
Any expenses incurred with the purpose of making money is deductible from tax. This means that if you drive to your rental property for an inspection, print a contract or pay rental agency fees – it’s tax deductible. The following can be deducted from tax:
- Trips to your rental properties – you can use AA rates for your car.
- Admin charges
- Selling costs
- Petrol for trustee/AGM meetings – you can use AA rates for your car.
- Rental agency fees
- Levies, rates, taxes
- Maintenance (e.g. stoves, light replacements)
- Accounting system fees for self-managed units
- Interest paid to the bank if you have a loan.
How can I pay less taxes when selling my rental property?
When selling your property in South Africa, you need to pay CGT. The best way to lower the capital gains tax is improving your property. In short, you incur expenses with the aim of increasing the value of your property. For example, if you spend money upgrading the kitchen or remodelling the bathroom, you can choose to deduct this at the time of selling, rather than on the annual income tax bill.
Bond and transfer fees are not deductible from your annual expenses. It is however deductible from the profit when selling, meaning you will pay less capital gainst tax.
Lower your income by having a bonded property
If you have a bonded rental property, you are allowed to deduct your interest paid to the bank (and bank fees!) from tax. In the early years of your bond, you will be paying a lot of interest and in this critical time pay less tax.
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.
Optimise your tax with tax by using the right legal structures
Choosing the right legal structure such as a trust or company can save you a lot of money in tax. 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!