Tax and deductions pertaining to rental property

The annual Income Tax season is here, and aside from general income, rental income earned as well as any profit made on the sale of property (subject to certain exclusions) must be included in your tax return.

Tax is unique to each individual and situation and it is therefore advisable to consult with a tax expert for the best advice for your particular circumstances. Broadly speaking, the following tax regulations apply to rental property.

Tax payable on rental income and allowable deductions

All rental income earned must be declared. It is not a separate tax, and must be included with your income on your annual tax return. This applies irrespective of whether you are renting out a whole property or just a room.

You can deduct certain expenses in connection with the rental property, but this would be operational expenditure only, and not capital expenditure. Capital expenditure would be anything which improves the property such as renovating, adding or upgrading it.

Operational expenditure include items such as bank charges, interest paid on a home loan, the cost of maintenance and upkeep, any costs incurred to find tenants, estate agency commission, and property taxes.

Losses in connection with a rental can also be offset against other income, but the provisions of "ring-fencing" apply. Consult a tax specialist for clarity.

For more information on tax on rental income, consult a tax expert, or visit SARS online.

Capital Gains Tax (CGT) on the sale of your rental property

CGT is not a separate tax. The gains/losses must be declared in your annual tax return which means that even if there was a loss on the asset when sold, it still needs to be declared.

Capital Gains Tax (CGT) applies to the sale of all primary and investment property sold for a profit which is referred to as a "gain". There is, however, a R2 million exclusion on a primary residence. If the property that you are renting out is your primary residence, then CGT will only apply to the gain made which exceeds R2 million.

If the rental property is a secondary property, then the full gain made will be taxable, subject to the normal annual exclusion allowance of R40,000 which would still apply.

To arrive at the taxable gain, you need to calculate the base costs (purchase price and improvements) which is then deducted from the selling price. The net gain over R2 million is then subject to CGT in the case of a primary residence and the full net gain in the case of secondary and subsequent properties, but the normal R40,000 exclusion would apply. The CGT tax rate is published on the SARS website and is currently 18% for individuals.

For more information or clarity, consult a tax expert, or read more here. 

Home is our Story and property our passion. While the property market is now in a cooling off period for various reasons, the upside of being a seller in Cape Town is that you are still more likely to find a buyer compared to elsewhere in the country. If you would like to know more about opportunities in the current market, please feel free to contact us at any time.

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