How rental income is taxed and what may or may not be deducted as capital and non-capital expenses
When submitting your Income Tax Returns, as a Natural Person who lets a property, you must declare the total amount of rental income made as ‘gross income' and you will be taxed at the marginal Income Tax Rate.
You may deduct non-capital expenses which you have incurred in the “production” of this income, which include:
- advertising for the property to let;
- rental agents’ commissions;
- interest paid on your home loan;
- insurance costs;
- depreciation of furniture if the property is let fully furnished;
- water and electricity;
- municipal rates;
- levies;
- fees paid to a cleaning service;
- repairs and maintenance costs (provided the property is in a lettable condition to start with and you entered into a lease agreement which requires you to make the repairs);
- expenses incurred on the treatment of any timber against attack by beetles.
Expenses that are deemed to be of a capital nature, cannot be deducted
These include improvements, reconstructions, or additions to the property. Also, repairs on a property that was previously left and which you now want to occupy and sell may not be deducted. These repairs would need to have been done while your property was occupied by tenants for trade.
If you are to declare a net rental loss the Income Tax Act contains a ring-fencing provision in Section 20A which may or may not be applicable, depending on the circumstances, that the set-off of these rental losses are not allowed against your other income. If you rent out your primary residence, the capital gain tax exclusion of R 2 million on your primary residence would be affected to take into account the rental activities.
For anyone thinking about evading paying tax on the income made through property rentals: It should be borne in mind that Rental agents are obliged to give SARS a document showing the rent collected and paid over to a landlord, so it is not advisable to try to evade paying tax on rental income. SARS will be able to locate this evasion on the landlord's income tax return.
This article originally appeared in Property Power 11th Edition Magazine. To order your copy at the discounted price of R120 click here.