Owning additional property and renting it out for an additional income has become a popular choice for many South African’s looking to diversify their portfolio. The rise in property prices has seen it become increasingly unaffordable to purchase for many first time buyers while those who have resources or access to finance have given rise to the rentvestor.
Becoming a Landlord for the first time requires plenty of research from sourcing tenants, to what to charge a tenant and even when to evict and how to evict a tenant. You will need to know the full scope of what you’re getting yourself into.
One area that many do not think of when looking to rent out property is the tax implications. In order to fully understand what influences the amount and increase of your rental income, you need to understand how it is taxed. Here is how it works
What is the rental of residential accommodation?
If an individual decides to rent out a property and gets a rental income, it will be taxed.
The rental of residential accommodation includes:
- Holiday homes
- Sub-renting part of your house e.g. a room or a garden flat
- Dwelling houses and other similar residential homes.
How is tax calculated on rental income?
The rental income you receive should be added to any other taxable income you may have. As well as any amount paid to you in addition to the monthly rental is also subject to income tax.
These additional amounts or lease premiums are generally paid in the form of lump sums at the start of the lease and the full amount is taxed in the year that it is received.
Can the taxable amount be decreased?
The taxable amount (rental income) can be reduced through the expenses sustained during the period that the property was let. However, only expenses acquired in the production of that rental income can be claimed. Any capital and/or private expenses won’t be allowed as a deduction.
Which expenses are allowed?
Expenses that may be deducted from taxable income include:
- Rates and taxes
- Bond interest
- Agency fees of estate agents
- Insurance (only homeowners not household contents)
- Garden services
- Repairs to the area let and
- Security and Property levies
Which expenses are not allowed?
Maintenance and repairs should be noted as definite costs and must not be tangled with improvement costs. Improvement costs are a capital expense that would be included in the base cost of the property, to reduce the capital gain (or loss) on the removal of the property.
Regarding VAT expense claims, the amount of a “dwelling” is an exempt supply for VAT purposes, and you can’t deduct VAT acquired on its expenses.
What if the expenses exceed the rental income?
If the expenses exceed the rental income, the loss should be available to be offset against other income earned by the homeowner, as long as the losses are not “ring-fenced” in terms of prevalent anti-avoidance provisions.
Keep your house in order
Now that you know how your rental income is taxed, you are able to put the accurate measures in place. Additionally, with this knowledge, you are wiser in the amount you charge your tenants in order to benefit both parties and be taxed appropriately.
If you need advice on your eviction case or would like us to represent your case, get in touch with Le Roux Attorneys