Tax and Property
Profit within the property sphere is normally taxed at your full income tax rate.
Though this might make you exceptionally happy (or not), the government tries to stimulate the economy by giving tax incentives to individuals and businesses who invest in the property sphere.
These often come in the form of tax breaks and tax discounts.
Nothing is ever free
The South African government’s debt is spiralling out of control, and the revenue services are sandwiched between stimulating the economy and getting money to pay the national debt.
Many of the tax incentives have clawbacks if you sell your property within a defined timespan. With others, you will lock your money into the scheme for a certain amount of time.
I do therefore suggest that you do your research thoroughly on these tax incentives and get the correct structures in place, including when it would be worthwhile to buy the property in a trust or company.
Did I mention you should do your own research as well?
Section 13 SEX
This is an Alert
Make sure you understand all clawbacks and exiting clauses before claiming this tax break.
Section 13 SEX in the tax law is an incentive to encourage people to build new (mostly residential) properties and use them for ‘business’. This is for new or unused residential rental properties.
If you are building a new property as a developer, it’s called a new property. If you buy the property straight from the developer, it becomes an unused property.
You need to have 5 new or unused properties.
As the tax incentive, you can deduct 5 % – 10 % of the property value every year, depending on some parameters.
Note that there are clawback clauses. This means that if you sell the property within the 20 years, you will need to pay back every cent of tax breaks back to SARS
Section 12 J
It has been decided to discontinue this soon
Note that Section 12 J investments are currently in the process of being phased out.
SARS realises that we need small and medium-sized businesses. They have here incentivised us, the humans, to invest in companies that can help grow the economy.
Section 12 J in the tax law covers how individual investors can invest in venture capitalist companies. I have personally come across examples of property companies which uses this act to raise capital to build property.
Investors in this section of the tax law are normally for people with R 1mil + to invest.
Your money will also be locked in for a few years, as per legal requirement. This is normally 5 years or more.
Performance fees, management fees and other evil fees which are not always explicitly stated are often charged by these companies.
With all this red tape, what is in it for me? Well, you will get a tax break – i.e. you get the income tax money back on the amount that you invest. This is done very similarly to how an RA works. You will also have the opportunity for capital growth.
Section 13 QUAT
Some inner cities look terribly dilapidated and old. SARS created urban development zones (UDZ) which allow for tax breaks when you invest in these areas.
For qualification, it’s quite complicated. Here are some of the requirements
- It needs to be either a new or renovated building of a minimum of 1000 square meters
- The building needs to be in one of the defined zones.
- You cannot claim both Section 13 SEX and Section 13 QUAT. It’s an either-or situation.
- Make sure that the developer has not already claimed this back on any part of the building, otherwise you’re in big trouble!
- You need to use this as a rental property / properties. You cannot claim this benefit as your primary residence.
Note that only some fees can be tax-deductible (see here). These include construction, drainage and security.
If you buy this as an unused property directly from the developer, you can deduct up to 55 % of the unused property. If it’s a fixer-upper (t’s and c’s apply), it’s up to 30 %. Please check the SARS link below for the exact breakdown of how much is claimed every year.
For SARS and tax returns, You would require a certificate from the municipality to prove that this is in a UDZ.
- Here’s the SARS page on this – READ THIS CAREFULLY AS THIS IS COMPLICATED
- Check a full article on this here from TaxTim.
Section 13 QUIN
Though I personally don’t invest in commercial property, the law allows for tax breaks on these as well. For all purposes of this article, it’s the commercial brother of Section 13 QUAT.
- Check out the SARS file here.
- TaxTim does a comparison here of the two.
- Cliffe Dekker Hofmeyr has another technical article here.
FLISP government subsidy
Though this is not a tax break, it’s worth a mention here.
FLISP is for people with the following:
- R3 501 and R22 000 per month
- You are a South African citizen or have permanent residency in South Africa.
- You have not received a government housing subsidy before.
- You have not owned fixed residential property before.
- You are competent to contract – over 18 years.
- You are married or cohabiting.
- You are single with financial dependents.
The subsidy can be used to make your bond amount less, and thus lowering your repayments every month.
More information can be found here.
Tax neutrality: rental properties with a bond
Though not on the SARS list, I want to mention the strategy of staying tax neutral. You’re able to deduct the costs involved with running a rental property which includes the interest paid to the bank, levies and rates & taxes.
This means that though you would need to declare all income and expenses, you’re not paying any tax on gaining the property – only on profit.
If you’re interested in this, check out my article on rental property strategy here!
There is no such thing as a free lunch.
Yet SARS gives people incentives to buy and hold property.
If this falls into your strategy, then you will be able to research and find some great deals to discover.