How to use Section 13sex in the income tax act as a tax break

S.E.X.! The thing everyone does and no one talks about! Section 13sex! The consequences of this law are almost as much as just sex! If you’re not excited about this, then you should be!

What is this Section 13sex that you are talking about?

This section in the tax law was written to help long term property developers and investors stay invested in the industry, and get rewarded for their investment. 

To be explicit in what this is – it’s not free money. It’s merely tax breaks that you will get if you stay invested in the long run. 

If you’re excited about long term property strategies, then this is for you.

If you want to read the law, here is the link for it.

The numbers:

As previously mentioned, the owner of the property will get a tax break for each new property they own. There are two types of people who will be able to get the tax break: the property developer (someone who built the property) or the person buying it from the developer.

  • A property developer can write off 5% per year (for 20 years) of all new and unused residential units against tax. This means we will get the full 100 % back of his investment in tax breaks.
  • The law also makes provision for new and unused improvements to existing buildings. For this, 30% of the property value may be claimed back over the 20 years. 
  • Buy to let investors can also claim, but only 55% of the price they paid for the unit.

How to qualify for it

  • You must own at least 5 properties in South Africa. 
  • The properties must be new or unused – this is a technical term for either you built the property yourself (you’re a property developer) or you bought it new from the developer
  • You must treat your properties like a business – 
    • You cannot live in the property. 
  • This must be residential properties
    • As you need to treat this as a business, it essentially means you need to rent out the property and people need to live in the property
    • This does not apply to workaholics like myself that live at work. 

Parameters and limitations:

  • The tax deduction is limited to the actual cost or the market value – whichever one is less.
  • You cannot stack your tax credits – if you claimed tax breaks under the income tax law on the property already, you cannot claim again
  • An extra 5% can be written off for low-cost houses – making this 10%
    • This is defined as properties worth less than R 350 000 and a rental factor of less than 1% of the property value. 
  • 5% can be claimed even if the building is acquired on the last day if the tax year

What is the catch?

If you think this sounds too good to be true, then you are right. The government is out to do two things: stimulate the economy and make sure your money stays locked in. This is done by giving you the tax break – but if you try and sell the property before the 20 years is over, you will be liable to pay back the tax breaks. 

If this makes you cry, then don’t worry – it makes me bleed from all my orifices all at the same time. 

Examples

The best way to illustrate the tax break is with some awesome examples:

The scenario:

An investor purchases five new residential units at R1 000 000 each.

Basic Calculation:

55% × (R 1 000 000 × 5) = R 6 000 000 (Cost of the 5 residential units)

R 5 000 000 × 5% = R 250 000 per annum (Allowance under section 13sex(1))

The scenario:

Company A acquired 6 new and unused apartments in a building at a purchase price of R320 000 each. The building, which is located in South Africa, has 30 apartments which are all used for purposes of residential accommodation. Company A has let the 6 apartments at a rental of R3 200 per month. 

The result: 

Company A will qualify for the allowance of 5% under section 13sex(1) equal to 5% of the cost of the residential unit. Under section 13sex(8)(a) the cost of a residential unit representing part of a building is deemed to be equal to 55% of the acquisition price.

Basic Calculation:

55% × (R320 000 × 6) = R1 056 000 (Cost of the 6 residential units)

R 1 056 000 × 5% = R52 800 per annum (Allowance under section 13sex(1))

Additional allowance for low cost:

An additional allowance under section 13sex(2) may be claimed as the apartments qualify as low-cost residential units: 

R 1 056 000 × 5% = R52 800 per annum

Conclusion

Before you get too excited or too terrified – remember that you need to invest for the long run. It’s the same for stocks, bonds and other investments. 

Don’t invest in just any property. Make wise decisions on where to invest.

Learn as much as you can and don’t be reckless.

Happy investing!

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