Navigating RSA Tax Laws: Considerations for Rental Income

CH Consulting |
19 March 2024
Hand holding leaves Illustration for CTA

Real estate investment can be lucrative, especially in South Africa, where rental properties often yield significant returns. However, along with the profit potential comes the responsibility of understanding and complying with tax laws. In this article, we’ll delve into the critical considerations regarding rental income and taxation in South Africa and the tax implications of selling a rental income property for both individuals and companies.

In South Africa, rental income is taxed as part of your annual income. It’s essential to accurately calculate and report your rental income to the South African Revenue Service (SARS) to ensure compliance with tax regulations.

Benefits

One of the benefits of earning rental income, apart from the added income, is the ability to deduct certain expenses associated with the rental property. These deductible expenses may include:

  • Interest and bank fees on mortgage bonds: If you’ve taken out a loan to finance the rental property purchase, the interest and bank fees paid on the bond are deductible.
  • Property maintenance and repairs: Expenses incurred for the maintenance and repair of the property can be deducted.
  • Rates and taxes: Municipal rates and taxes paid on the property are also deductible.
  • Insurance premiums: Premiums paid for insurance coverage on the property can be claimed as a deduction.
  • Property management fees: If you enlist the services of a property management company, the fees paid to them are deductible.
  • Professional fees: Assuming the consultation pertains to rental income, seeking professional assistance in legal or accounting capacity makes these fees deductible. 

Deducting Expenses, if You’ve Had No Tenant for a Period

Property owners can generally still deduct expenses even if the property is vacant for a period. However, deductions must be directly related to the rental property and incurred in producing rental income. It’s essential to keep records of expenses incurred during vacancies to support deductions.

It is worth noting, however, that to claim these expenses, one needs to prove that they were actively searching for a tenant within that period. This could be in the form of an estate agent / posting ads online individually. SARS will use its discretion as to whether or not the claims can be considered if no income was generated.

Once deductible expenses have been accounted for, the remaining rental income is subject to tax. The total profit earned from the rental income would be combined with all other income and form your taxable income. This is then taxed per the relevant tax bracket in the South African tax tables.

Filing Requirements

Individuals earning rental income must declare it in their annual income tax return. Failure to disclose rental income could result in penalties and interest being levied by SARS. It’s essential to keep accurate records of rental income and expenses throughout the year to facilitate tax filing.

As rental income would qualify a taxpayer for Provisional Tax, knowing the process beforehand can help you prepare better. You will need to file for provisionals twice each tax year. It is advisable to save a portion of your monthly profits to pay the bulk tax payment that may be required based on your total taxable income and tax bracket.

Being able to think ahead allows for complete payment and compliance to be achieved without any fuss and encourages other future planning.

A second example is understanding the difference between buying/selling a rental property in one’s capacity vs a company’s capacity. There are many aspects that one would need to consider, however – the tax implications for each scenario are explained below.

Tax Implications for Individuals

When an individual sells a rental income property, they may be liable for capital gains tax (CGT). CGT is calculated based on the profit from the property sale, considering the difference between the selling price and the base cost (original purchase price plus certain allowable expenses and improvements).

Key points regarding CGT for individuals selling rental properties include:

  • Exclusions and exemptions: Individuals may qualify for specific exclusions or exemptions from CGT, such as the primary residence exclusion or the small business asset disposal exclusion. These exemptions can significantly reduce or eliminate CGT liability, depending on the circumstances.
  • Calculation of CGT: CGT is calculated at the individual’s applicable tax rate, which is determined based on their total taxable income, including capital gains. Individuals should ensure accurate record-keeping to calculate the capital gain or loss correctly.
  • Timing of the sale: Timing the sale of a rental property can have implications for CGT liability. Individuals may consider market conditions and their overall tax position when deciding when to sell.

Tax Implications for Companies

When selling those properties, companies that own rental properties are subject to different tax rules. Here are some critical considerations for companies:

  • Corporate tax on capital gains: When a company sells a rental property, any capital gain realized is subject to corporate tax at the applicable rate. Unlike individuals, companies do not benefit from the same exclusions or exemptions available for CGT.
  • Dividend tax implications: If the proceeds from the sale of the rental property are distributed to shareholders as dividends, those dividends may be subject to dividend withholding tax.
  • Depreciation recapture: Companies may also need to account for depreciation recapture when selling a rental property. Depreciation claimed on the property in previous years is added back to the company’s taxable income, potentially increasing the tax liability on the sale.

Individuals may be eligible for certain CGT exemptions if the property was initially used as a primary residence and later rented out. The portion of the gain attributable to the time the property was used as a primary residence may be exempt from CGT, subject to certain conditions and limitations.

On the other hand, if the Property was initially rented out and then later converted to a Primary Residence, CGT may apply to the portion of the gain attributable to the rental period. However, specific exclusions or exemptions may apply depending on the circumstances.

For those renting out a section of their private residence, CGT may apply to the portion of the property used for rental purposes. The calculation of CGT considers factors such as the proportion of the property used for rental, the duration of the rental period, and any applicable exemptions or exclusions.

Property can be a valuable source of revenue for taxpayers in South Africa, whether from the rental income or the sale of the property. By accurately reporting rental income, deducting eligible expenses, and meeting filing requirements, landlords can ensure compliance with South African tax laws while maximizing their investment returns.

Selling a rental income property in South Africa triggers a tax implication for individuals and companies. Understanding the rules and regulations surrounding capital gains tax is essential for accurately calculating tax liabilities and optimizing the overall tax position. In either scenario, seeking professional tax advice can help navigate the complexities of property sales taxation and ensure compliance with South African tax laws. Property investors can minimize tax liabilities and maximize investment returns by staying informed and proactive.

If you would like to know more about your rental income, you are welcome to book a call. Check out our Google Reviews to see what other customers have experienced when working with us or email us at info@chconsulting.co.za if you have any questions.