The taxation of rental income is relevant whether you rent out a spare bedroom or own an extensive real estate portfolio. The scope of this article is limited to the rental of residential accommodation, i.e. guesthouses, apartments and dwellings.
Income from the property
Rental income forms part of a lessor’s gross income. For some, it may supplement their salary or be a dominant source of income. The receipt of rental income also makes the lessor a provisional taxpayer with the relevant filing and provisional tax payment obligations.
Expenses
Maintaining a rental property can be expensive, with many of these expenses being deductible for tax purposes. However, deducting the wrong expenses can lead to unpleasant interactions with SARS.
Examples of deductible expenditures include:
- Water and electricity
- Rates and taxes (limited to municipal rates and taxes – not tax in terms of national legislation)
- Levies
- Security
- Insurance (only homeowner’s insurance not covering the contents of the property or bond insurance)
- Estate agent fees and advertising to potential lessees
- Repairs (as opposed to improvements)
- Mortgage/bond interest (not capital repayments)
These amounts are generally recognised as being in the production of the rental income.
Capital expenditure
Capital expenditure is not deductible from a taxpayer’s income. Instead, it may be relevant when determining the extent of a capital gain once the rental property is disposed of. A capital gain or loss is the difference between an asset’s base cost and the proceeds from its disposal. The base cost of a rental property will include not only its purchase price but also additional items, such as improvements made to the rental property and transfer costs. Keeping track of all capital expenses to a rental property is crucial in calculating the correct amount of capital gains tax.
VAT
Supplying (i.e., selling) residential accommodation is exempt from VAT, decreasing the administrative burden but not allowing taxpayers to claim input taxes on expenditure incurred.
Keeping records
Properly storing supporting documentation is paramount to successfully claiming expenses and proving the base cost of rental property. We recommend storing all invoices and proof of payment orderly. Additionally, taxpayers should keep a proper records of their income and expenditures to make submitting a tax return as seamless as possible.