To calculate the tax consequences linked to home loans, we first need to differentiate between your primary residence (i.e. property you live in) and a buy-to-let property.
Your primary residence
You’re generally not allowed any tax deductions for the interest portion of the home loan repayment. If, however, you have a home office you could potentially deduct a portion of the interest repayment. Since only a portion of the premises is used for work, the following allocation can be made:
- A / B x total costs
- A = the home office area in m², equipped and used regularly and exclusively for trade; and
- B = the total area in m² of the residence, including any outbuildings and the area used for trade.
The Primary Residence Exclusion, brought to you by SARS
Homeowners can benefit from a Primary Residence Exclusion based on the following conditions: No capital gains tax will be payable if the capital gain on your primary residence is less than R2m (first exclusion), or if you sell your primary residence for less than R2m (second exclusion).
However, if you’re claiming expenses in relation to your home office, specific tax rules apply. The Primary Residence Exclusion will be allocated using the same ratio you use to claim expenses.
On buy-to-let property, tax deductions are allowed against rental income. The interest portion of the home loan repayment (linked to the buy-to-let property) will generally be deductible. The Primary Residence Exclusion does not apply to buy-to-let properties.
In both instances (primary residence and buy-to-let), the interest saving generated by parking more money in your home loan is not taxable.