With the annual tax season upon us, Seeff Southern Suburbs and Constantiaberg rental agents share pertinent information from SARS regarding the tax regulations relating to rental properties.
Rental property owners pay tax on rental income because the activity is viewed as profit-generating, similar to running a business. Therefore, it must be declared as part of your total gross income, regardless of whether it is a primary income source or a small side income. This applies to all rentals.
Whether it is an entire property or just a room, flat or cottage, the rental income must be declared for tax purposes. It must also include all income earned from platforms such as Airbnb.
While the income is taxable, you may deduct certain expenses. It is therefore advisable to treat the rental as a business, and keep careful records of all income and expenditure for tax purposes.
Expenses which can be deducted from Rental Income
Numerous expenses can be deducted to reduce the tax liability on the rental income earned.
However, these expenses must be directly related to the rental property and provable. These include property taxes and utilities such as water, electricity, refuse and so on. You can also deduct the cost of cleaning, maintaining the garden and exteriors, and general repairs and maintenance.
If there is furniture provided in the rental, you can deduct an allowance for wear and tear in the form of depreciation on the furniture or equipment, for example lounge or bedroom furniture, appliances, etc.
If there is a home loan on the property, you can also deduct the interest paid as well as any bank charges. Additionally, homeowner’s insurance pertaining to the rental property can also be deducted. Similarly, any marketing costs to source and find tenants such as promoting the property, photography, listing fees, and rental agency commission, can also be deducted.
You must keep detailed records of all income and expenses for 5 years.
Capital Expenditure may not be deducted
Any expenditure related to improvements such as building a new room or renovating any part of the premises, etc. is not regarded as an expense but as capital expense, which cannot be deducted against income.
Ring-fencing Losses
Should you find a net loss once expenses are deducted from the income, you may offset that loss against your other income. If, however, it is a loss-making hobby or not a true business, SARS may "ring-fence" it, meaning the loss can only be used against future rental income.
Capital Gains Tax (CGT) applies when you sell your rental investment
Should you decide to sell your rental property investment, the normal Capital Gains Tax (CGT) on the sale of immovable property will apply.
In the case of CGT, there is a R3 million exclusion which applies to a primary residence only. That means that when you calculate your net gain (i.e., the original purchase price and improvements (“base cost”) deducted from the selling price), the first R3 million gain is not subject to tax.
If the property is not a primary residence, the R3 million exclusion falls away, however, you can still deduct the R50,000 general annual exclusion allowance for individuals.
Visit https://www.sars.gov.za/types-of-tax/personal-income-tax/tax-on-rental-income/ for more information.