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January 29, 2018

Tax and Property

Everything you need to know about the confusing world of property tax

The world of property tax can be confusing, especially for those new to the property market. It’s why many sometimes overlook this and end up paying exorbitant fees in the end. If you’re investing in property, we breakdown some of the tax terms you’ll encounter and  how to invest for maximum profits after tax (for both rental and sale properties).

What is capital gains tax?

This is a very important tax you have to look out for if you plan to sell your property for a profit. Capital gains tax (CGT) is enforced when the sale of an asset is higher than the initial purchase price upon the sale of that asset. It’s also incurred on the donation, loss or destruction of the asset as well as when someone passes away. This is included in your annual income tax return. CGT does not apply to any profits under R1.5 million on your primary residence.

Should you purchase your property in your own name or in a trust?

If you are using the house as your primary residence, it’s best to buy it under your own name. This is because you will be eligible for the CGT exclusion. Any profit you earn on the sale on the house under R1.5 million will not be taxed. The transfer duty is also lower for a property under your name, the highest being 8% on if the purchase price is over R1.5 million.

On the other hand, if you are buying a second property, it’s best to buy it in a trust because it gives you security against creditors, spreads the rental income and CGT among various beneficiaries and pegs the value for estate duty purposes. It will also not be part of your estate so your beneficiaries will not have to pay certain death bed taxes. There will be no freezing of the property as it is not part of your personal estate. This means that if you were to sell the property, you will have immediate access to the money from the sale.

Tax on rental property

If you intend to rent the property out, you need to be aware of the various ways rental property is taxed. If you are receiving a rental income, it will be taxed. It is added to any other taxable income that you have. The lump sum that most landlords receive at the beginning of the lease is also taxable as a lump sum in the year that it was accrued. The amount of rental tax can, however, be reduced.

What can you claim as a deduction on tax on rental property?

You can claim for expenses incurred in the production of your rental income. For example:

  • Rates and taxes
  • Bond interest
  • Advertisements
  • Agency and estate agent’s fees
  • Insurance – only homeowners not household contents
  • Garden services repairs and security
  • Property levies

Maintenance costs should however not be confused with improvement costs.

Improvement costs are a capital expense this is included in the base cost of the property and will reduce the amount of CGT you have to pay. If your losses exceed your rental income, the loss should be offset against other income earned by the homeowner. In conclusion, the homeowner needs to be able to satisfy SARS that they are carrying on a bona fide trade through the rental income.

Need more information on property taxes? Book a seat at one of our FREE property investment seminars today!

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