While still inhabiting and paying off the bond, there is nothing much to get excited about until you decide to upgrade or downgrade your permanent residence by means of selling.
If the property is registered in an individual's name, it will be liable for capital gains tax (CGT). A capital gain arises when you dispose of an asset. Craig Hutchison, CEO of Engel & Völkers Southern Africa, explains that the first R2m is exempt from CGT if it is the owner's primary residence, and if the property is registered to an individual.
The benefit of owning a property in a personal capacity is that the income tax paid when selling for a profit on the holding, might be lower (as little as 33.3% on the non exempt portion) than the tax paid if the property is owned in a company or trust's name. There is no minimum period that a person must live in a residence to claim it as a primary residence.
However, the taxpayer must be able to convince SARS that the residence is his or her ordinary residence. A taxpayer who buys and sells properties at short intervals runs the risk of being classified as a property trader in which case any profits on disposal will be taxed in full as revenue gains.
“When a decision is made to buy a property as a buy-to-let-investment, it is important to consider and plan what sort of strategy you have in owning the property and then choose whether to own it outright or to register it in the name of a company or a trust,” Hutchison says. 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, it will lead to additional penalties over and above the normal tax payable. Examples of these include receiving income from holiday homes, bed-and-breakfast establishments, guesthouses, sub-renting part of your house e.g. a room or a garden flat and dwellings on one's property.
The rental income you get should be added to any other taxable income you may receive be it a salary, consultancy fee or commissions earned by any trade. Any amount paid to you in addition to the monthly rental is also part of your income tax. These additional amounts or lease premiums are usually paid in the form of lump sums at the start of the lease and the full amount is subject to tax in the year that it accrues.
A refundable deposit paid by a tenant is not taxable provided it is kept separately in a trust account or any other separate account to your personal account and is not used by you, but if it is not paid back to the tenant for any reason whatsoever, it will be taxable, since its then seen as an additional income.
The taxable amount (rental income) may be reduced as you may have expenses during the period that the property is being rented out. Only expenses that occurred in the rental period can be claimed. Any capital and/or private expenses won't be allowed as a deduction. Expenses that may be deducted from taxable property income include rates and taxes, bond interest, advertisements, agency fees of estate agents, insurance (only home owners, not household contents), garden services, repairs, security and property levies.
Maintenance and repairs should be noted as specific costs and should not be confused with improvement costs. Should the expenses exceed the rental income, the loss should be available to be written off against other income earned by the home owner.
“When compiling your tax return for 2015, perhaps consider contacting one of our sales advisors to look into investment property for the coming year. Before buying your second home ensure you are assured of maximising your money's potential and having an additional income generating property, will remain a great asset as well as a long-term investment. Be clear on what your objective and budget is, and be involved with the management of the whole rental process,” advises Hutchison.
