Property Expenses not allowed.
According to Alvin van Staden, a director at The Consulting Services Hub, maintenance and repairs should be noted as specific costs, and these should not be confused with improvement costs. The latter is a capital expense that would be included in the base cost of the property, to effectively reduce the capital gain (or loss) on the disposal of the property, for capital gains tax purposes.
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When it comes to VAT expense claims, residential accommodation is exempt for VAT purposes, so you can’t deduct the VAT incurred on the expenses. However, if the dwelling supplies commercial accommodation (such as a hotel, B&B or lodge), the owner will be entitled to a VAT expense claim in terms of specific rules in the VAT Act, if the owner is a registered VAT vendor.
What if the expenses exceed the rental income?
Should the expenses exceed the rental income, you should be able to offset the loss against other income earned by you, provided that losses are not “ring-fenced” in terms of prevailing anti-avoidance provisions. You must effectively be able to satisfy SARS that you are carrying on a bona fide trade through the rental of your property.
Can you qualify for specific allowances?
Tertius Troost, a tax consultant at Mazars South Africa, says that in certain circumstances you can qualify for specific allowances when letting out a property, which you may deduct from the rental income:
Urban Development Zone (UDZ) allowance. If the property is located in a UDZ, you will be able to claim certain allowances. These allowances are dependent on the nature of the building. You will need to obtain a certificate from the developer or municipality stating that the property is in a UDZ.
Section 13sec allowance. Under this section of the Income Tax Act, if you own at least five new and unused residential properties situated in South Africa, you will be allowed to claim an annual allowance of five percent of the purchase price as a deduction, as long as you are letting out the properties. This allowance is recouped by SARS when you sell such a property.
Investing in property can be financially rewarding. But without correct information on which taxes are payable and how much, you could find that your purchase landing you in trouble with the Receiver of Revenue and knee-deep in debt. And if caught evading tax, you could face a hefty penalty or imprisonment.
Here is a checklist of documents to be kept on file for tax season (for an entire year or part thereof where applicable):
– Monthly rates and taxes statements
– Monthly home loan statements from the bank
– Levy statements
– Homeowners insurance schedule
– Any utility bills for services included in the rental
– Advertising and agency invoices
– Slips and invoices for any repairs and maintenance done
– Garden services or any other services necessary to make the home rentable
Author: Alvin van Staden
Original Publisher: IOL