What is property speculation and how is it taxed?
Property speculation is defined as buying property to resell it at a profit and it is regarded as a trade under South Africa’s tax regime. That means any profit you make on the sale over the property is taxable as is the income you generate by renting it out. Some expenses you run up between buying and selling the property are tax deductible – for example interest paid on a bond and rates, taxes and levies. But you can’t claim these expenses against both your rental income and the proceeds from the sale of the property.
What about buying a property to rent it out?
If you buy a property primarily to generate rental income, you may claim all expenses related to the day to day running and maintenance of the property as a tax deduction. Some examples of these tax deductible expenses are interest paid on the bond; levies, rates and taxes; and repairs. Capital expenses – such as improvements or extensions to the property – may not be deducted against rental income.
And what if I incur a loss on a property I rent out?
A bonded property will usually reflect a taxable loss for around the first five years of the investment. SARS lets you handle the loss in one of two ways:
- Deducting the loss from your other income, reducing your total taxable income.
- “Ring-fencing” the loss.
If you ring-fence the loss, it is not deducted from your other income, but carried forward until the rental property reflects a profit. The accumulated losses will be deducted from future rental profits before being included in your taxable income. You still get the tax benefit, but accrued over a longer term.
What documents does SARS require from me if I own an investment property?
As with any other source of income, you must keep accurate records about the income and expenses associated with your investment properties. Ensure that you keep original source documents. These records should reflect clear distinctions between capital and trade expenses.
Will I have to pay capital gains tax?
When you dispose of a property you have bought to rent out for profit – one other than your primary residence – you will be liable for capital gains tax on the profit from the sale. The cost of any capital improvements can be added to the base cost of the property to reduce the taxable portion of the profit. A capital gain is taxed at a much lower rate than a profit generated by speculating in property.
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