The ultimate guide to the Section 13sex incentive
The ultimate guide to the Section 13sex incentive
Section 13sex is an important tool for all property investors. Even if your properties are cash flow positive and profitable through your rental income, you can still reduce your tax liability substantially through a key tax incentive. In certain situations, you can even eliminate income tax legally whilst remaining cash flow positive!
When I started my property investment journey more than 20 years ago, I was struggling. I was all alone and I had no team, no knowledge, and no clear strategy.
I was totally ignorant of what type of properties to buy and how I could qualify for tax incentives. Even when I eventually found out how it worked, I didn’t understand how to legally and optimally apply it to my property investment plan.
The first property I bought was my starting point to building substantial wealth. I always knew and heard from experienced investors that the key to building a property portfolio is to start. Everybody today who owns a property empire started with one property.
After years of struggling, I discovered the one method and way of investing that totally changed my investment career. It is the one method changing the lives of thousands of property investors all across South Africa.
Through trial and error, I found out how I can leverage SARS to help me finance, fund, and build my buy-to-let property pension.
This phenomenal tax incentive is called Section 13sex and is firmly entrenched in the income tax act.
Property investors always ask me at our property investment seminars, “Jacques, what is Section 13sex and what do I need to do to qualify for it?”
So I am going to give you a brief overview and some background.
For years accountants had advised their clients to claim depreciation on certain moveable assets. But there was no provision to depreciate investment property.
It is important to note that some forms of structures could claim allowances, without getting into too much detail. For instance, hotels could claim 5% depreciation annually under a section of the Income Tax Act.
But buy-to-let property fell outside this ‘depreciation arrangement’ hotels enjoyed.
What Section 13sex allows is this – a developer can write off the cost of all new and unused residential units they erect after 21 October 2008 at a rate of 5% per annum.
This write-off also applies to the cost of new and unused improvements to existing buildings. It’s also important to note that the 5% can be claimed even if the building is acquired on the last day of the tax year.
Buy-to-let investors who purchase residential units can also claim an allowance. However, it is limited to a total of 55% of the price they paid for the unit.
What this means is you will still be entitled to claim an allowance, even if you are not the developer!
How do I qualify?
Here are the four key requirements to qualify for the Section 13sex tax allowance in the infographic below:
There are three other important points to take note:
- The tax deduction is limited to the lesser amount of the actual cost. This is to prevent unscrupulous taxpayers from inflating the price in order to claim higher deductions.
- If the taxpayer has claimed the same property under another section of the act, no allowance is permitted.
- Sale proceeds will be subject to normal income tax. There are many ways to overcome this, and you can discuss it with one of IGrow’s tax and property specialists.
Now that I said all of this. I am sure not all of you will know exactly how much money SARS will actually give you back every year.
Remember the tax incentive and write off is over a 20 year period.
A simple example
If you buy 5 one million rand properties. Your property value will be R5 million.
SARS will allow a 55% write off against the acquisition price as a deduction against your taxable income.
There are certain properties that can qualify up to a 100% tax write off. Now, this is (irrespective of the purchase price of the properties) what most qualified attorneys and accountants do not know.
If you work on the minimum tax write off of 55% of the initial purchase price of the five properties bought for R 5million, SARS will give you a cheque – every year of close to R57 000 for 20 year years.
Get a specialist team
When investing your own capital and making financial commitments as you use property investments to grow your wealth it is vital to get the very best tax advice in order to maximize your allowances.
For advice and guidance, IGrow Chartered Accountants part of the IGrow Group have a highly qualified team of property investment tax specialists that will take you through a step by step process to ensure you get back every cent from SARS.
Contact us at IGrow Wealth Investments. My team of tax specialists and property strategists are looking forward to helping you create a property portfolio that will serve you and your family at retirement and beyond.
Invest intelligently, invest strategically and become financially free. Click here to book your free consultation.
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About Jacques Fouché
Jacques Fouché is one of South Africa’s leading real estate investment trainers and entrepreneurs. Moreover, he is also the CEO and founder of the IGrow Group of Companies, currently consisting of ten real estate investment-related companies.