Cape Town – All income from property investments must be declared to Sars and is subject to income tax, including rental income, said Johan Swart, a tax manager at Legal and Tax.
“The important factor with owning an investment property is that all expenses are deductible from the rental income, before tax is calculated.
“This includes interest on the bond, repairs, maintenance, levies and rates and taxes. Should this place you in a loss situation, as it is likely to do for the first five years if you bought the property utilising a bond, Sars handles the loss in two ways,” he said.
“Firstly Sars can, and in most instances do, deduct the loss from your total income at year end, before calculating your tax liability on your assessment. This makes a property investment even more attractive.
“Secondly, and if you are a top tax bracket income earner, Sars will ring fence the rental loss.
“That means the losses will only be deductible from future rental income, instead of being deducted from any other source of income, like your salary. But, this is still not a bad business proposition because it means that you will not be earning a taxable rental income for a few years.”
Property held in a Trust
The primary motivation for holding a property in a trust should be for the protection and preservation of the property, said Swart.
“Whether you want to protect the property against future financial threat, or preserve it for your children, the motivation should not be because of any tax advantages, although as the current tax law stands, there may be a tax advantage.
“The tax treatment of rental income received by a trust is the same as for any other tax entity. The advantage would be the distribution of the income. One of the basic rules of a trust is that the creator cannot be a beneficiary; for example, when a parent would put a rental earning property into a trust for the benefit of his four children.
“The tax benefit is that instead of the parent getting taxed on the full rental, each of the children will be taxed on a quarter of the rental after distribution from the trust.
“The downside of a trust is that it comes with onerous compliance issues – these include the appointment of trustees, annual financial reviews, and technical tax issues that will in most instances require professional assistance.
“There are also tax implications to setting up the trust and transferring any assets, like a property or money, from an individual to the trust. The capital gains tax implications, should the property be disposed of, is also different to that of an individual, and the tax rate higher.”