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Thread: Property Investment - Tax Benefits

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    Bronze Member rfnel's Avatar
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    Property Investment - Tax Benefits

    Hi Folks

    I'm trying to help someone out with a tax query relating to an investment property.

    Imagine the following scenario;
    John buys a flat for R600 000, with the intention of renting it out. He takes out a bond for the full amount, at a 7.5% interest rate, which results in a monthly payment of around R4800. Initially roughly R4000 of the bond repayment goes towards interest. Levies amount to R900 per month. Let's assume that the property is brand new, so we'll leave maintenance out of the equation.

    John can rent the flat out at R6000 per month, and we can assume that John's taxable income from other areas amounts to R500 000 per year (as it stands, John would then be paying around R115 000 income tax, annually).

    John also has a lump sum of R200 000, which we can assume he can invest at 10% per annum, or which he can pay off on his bond. If John opts to pay his capital off against his bond, the interest portion of his repayment will drop to R2400 per month.

    My questions are as follows:
    1.) Will John's rental income be added to his total taxable income, and treated as a single amount? (R572 000 in this case, which means that his total income tax goes up to around R144 000).
    2.) Would the interest portion of the bond and the levies be tax deductible? (R4000 + R900) If this is the case, would John be able to claim back a full R58 800 (R4900 * 12) at the end of the tax year?
    3.) Would John be better off investing his lump sum, or paying it off against his bond?

    Assuming that the bond interest and levies can be reclaimed from SARS, I foresee that John will be better off investing his lump sum and claiming his expenses back from SARS. If he can indeed do that, he'll have just under R280 000 at the end of the year (R200 000 lump sum + 10% interest + money claimed back from SARS). Repeat the process for a couple of years, and John should have enough to settle the bond in full.

    What do the experts say?
    "Fortune favours the bold" - Virgil
    Riaan Nel
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    Gold Member Houses4Rent's Avatar
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    Hi Riaan

    1) If the property is owned in his personal name all net rental income is his personal income and simply be added to other taxable income.

    2) He can deduct the interest portion of the instalment only. Bank will issue a certificate at tax year end.
    He can deduct the levies and many other things too e.g. agent costs, repairs etc.

    3) That depends on many things. I would use it as a deposit for the next property. The more a property is geared the better - in broad terms - as he is using someone elses money (bank, tenant) to acquire an asset. If its sitting in a bank it will lose buying power as returns will be below inflation.
    Houses4Rent
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    Global Residential Property Investor / Specialized Letting Agent & Property Manager

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    rfnel (26-Sep-14)

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    Quote Originally Posted by Houses4Rent View Post
    Hi Riaan

    1) If the property is owned in his personal name all net rental income is his personal income and simply be added to other taxable income.

    2) He can deduct the interest portion of the instalment only. Bank will issue a certificate at tax year end.
    He can deduct the levies and many other things too e.g. agent costs, repairs etc.

    3) That depends on many things. I would use it as a deposit for the next property. The more a property is geared the better - in broad terms - as he is using someone elses money (bank, tenant) to acquire an asset. If its sitting in a bank it will lose buying power as returns will be below inflation.

    Totally agree with Houses4Rent.
    Invest the R200K into something else (another property) and get the property into a Trust rather than in an individual name.
    You can donate R100K per annum to the Trust out of your personal capacity, so build the ability to fund and reduce taxes further.
    Keep in mind that if you ever sell, CGT is payable.

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    rfnel (26-Sep-14)

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    I'm not a tax guy but I wouldn't want to keep R58 000 in SARS coffers and only claim back at year end would stiffle cash flow, same with investing lump sums into the bond. Extra cashflow can be used for other business ventures, purchases etc.

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    Bronze Member rfnel's Avatar
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    Quote Originally Posted by Houses4Rent View Post
    Hi Riaan

    1) If the property is owned in his personal name all net rental income is his personal income and simply be added to other taxable income.
    Thank you for your response.

    Would net rental income include only his rental income minus his bond and his levies? In other words, if his rental income is R6000 and his bond repayments of R4800 and his levies of R900 amount to R5700, would the total amount added to his taxable income be only R300 per month (i.e. R3600 over the course of a year)? In this event, assuming that his total tax for the year is then only slightly more than the R144 000 he would've paid without the rental income, could he still claim back his R58 800 worth of expenses from SARS?
    "Fortune favours the bold" - Virgil
    Riaan Nel
    Freelance Software Development | LinkedIn | Skype

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    Bronze Member rfnel's Avatar
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    Quote Originally Posted by reuphk View Post
    Totally agree with Houses4Rent.
    Invest the R200K into something else (another property) and get the property into a Trust rather than in an individual name.
    You can donate R100K per annum to the Trust out of your personal capacity, so build the ability to fund and reduce taxes further.
    Keep in mind that if you ever sell, CGT is payable.
    What would the tax benefit be of getting the property into a trust? I can't remember the exact figures, but isn't tax still pretty high on a trust? I know there is a lot of hype around keeping investment properties in a trust, but I'm afraid that I don't know enough about it to actually see the value.
    "Fortune favours the bold" - Virgil
    Riaan Nel
    Freelance Software Development | LinkedIn | Skype

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    Bronze Member rfnel's Avatar
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    Quote Originally Posted by Basment Dweller View Post
    I'm not a tax guy but I wouldn't want to keep R58 000 in SARS coffers and only claim back at year end would stiffle cash flow, same with investing lump sums into the bond. Extra cashflow can be used for other business ventures, purchases etc.
    As I see it, by keeping the interest on the bond high, you can claim back a larger percentage - in this case, R58 000 at the end of the year. By pushing more money into the bond, you'll bring your payments down by a couple of hundred rand a month, but you won't be able to claim as much back - so John's R200 000 capital will be gone anyway; he might save a few thousand rand on interest, but he won't see his R58 000 at the end of the tax year.
    "Fortune favours the bold" - Virgil
    Riaan Nel
    Freelance Software Development | LinkedIn | Skype

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    Gold Member Houses4Rent's Avatar
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    Net rental income is rental income less all deductible expenses like, bind interest, levies, agent fees, repairs etc.

    He cannot deduct expenses twice.
    Houses4Rent
    "We treat your investment as we treat our own"
    marc@houses4rent.co.za www.houses4rent.co.za
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    Gold Member Houses4Rent's Avatar
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    A trust will never pay any tax in its own capacity if the profits (if any) get distributed to one or more beneficiaries where they then will be taxable.
    E.g. trust profits are R40000. Each of the four beneficiaries receives R10000 and only taxes that typically at a lower tax rate than a trust.
    Its called the conduit (flow through) principle.

    The objective of forming a trust is not really a tax saving, but a combination of various reasons, but forming and running a trust costs money too.
    Houses4Rent
    "We treat your investment as we treat our own"
    marc@houses4rent.co.za www.houses4rent.co.za
    083-3115551
    Global Residential Property Investor / Specialized Letting Agent & Property Manager

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    Quote Originally Posted by rfnel View Post
    if his rental income is R6000 and his bond repayments of R4800 and his levies of R900 amount to R5700, would the total amount added to his taxable income be only R300 per month (i.e. R3600 over the course of a year)? In this event, assuming that his total tax for the year is then only slightly more than the R144 000 he would've paid without the rental income, could he still claim back his R58 800 worth of expenses from SARS?
    I don't think it works this way, only interest is deductable as an expense and not the capital. The capital is an investment payment not an expense.

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