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Thread: tax on profit or loss on investment property

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    tax on profit or loss on investment property

    I've asked this question on another thread & on Dave's suggestion have posted it here in the hope of getting a qualified response.

    A taxpayer buys an apartment/flat for investment purposes. This presently produces an annual loss ,meaning that the taxpayer subsidises from his own pocket the interest & levy payments as the rental received presently is inadequate to cover this.

    My question is : can the taxpayer offset this loss against his taxable income?? The taxpayer is an individual.

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    Full Member tax$$$'s Avatar
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    HI flaker

    Sec 20 and 20A has certain rules about losses and the "ring-fencing" of certain assessed losses.

    More information will be needed: Is the person leasing the apartment to a reletaive? For how many years did the taxpayer incur losses?

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    Quote Originally Posted by tax$$$ View Post


    More information will be needed: Is the person leasing the apartment to a reletaive? For how many years did the taxpayer incur losses?




    thanks for response.Not leased yet & it is a theoretical question. It is *envisaged that it may make a loss for the 1st say 5 years. That is just the loss on rental of the apartment.there would be other taxable income that would lead to a net income (profit)

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    Okay, assuming that the apartment is not leased to a relative (otherwise it will qualify as a suspect trade and will be ring-fenced from the start) and the taxpayer is taxed at the maximum rate (ie 40%):

    For the first 2 years you can include the loss in your total taxable income. There is a rule that if you have assessed losses for 3 out of 5 years, the trade becomes a suspect trade. In your example the trade will become suspect in the 3rd year and the assessed losses will be ring-fenced from there on forward (certain escape hatches exist).

    From the 3rd year the assessed losses cannot be included in the taxable income of any other trade. It can only be utilised against profits from future years for the given trade.

    If however the taxpayer pays tax at a lower rate than 40%, then none of the this is applicable (should have mentioned this first I guess..) and Sec20A can be ignored. The losses can then be deducted from other taxable income.

    Hope I made sense.

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    Dave A (05-Nov-12), dellatjie (15-Nov-12), flaker (06-Nov-12)

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    Gee. thanks. That makes a lot of sense. And it clearly illustrates what "ring fencing" is. would you mind giving examples of "certain escape hatches"

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    Sorry, not hatches, only hatch really

    If you can prove that the trade is a legitimate business and that future taxable income is expected within a reasonable period.. (don't know how long). This means having a business plan and proving that expenses does not unreasonably outweigh the income - Like have repairs of R100 000, but only income of R1 000.

    If however you make losses for 6 out of 10 years, then this also does not apply and the assessed losses will be ring-fenced.

  8. Thank given for this post:

    dellatjie (15-Nov-12), flaker (06-Nov-12)

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