[Question] tax on profit or loss on investment property

[flaker]

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.

[tax$$$]

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?

[flaker]

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)

[tax$$$]

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.

[flaker]

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"

[tax$$$]

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.

[Michael Stolman]

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.

"If however the taxpayer pays tax at a lower rate than 40%," scenario
What happens if the losses on 1 of 3 properties "wipe out" the other taxable income basically creating a scenario where SARS would need to pay the Landlord. If I have the three properties as a "single trade" Would/could the losses on the "losses" property be ring fenced and applied against future profits? NB properties have for many years run at a profit but due to Covid and tenant squatting this created the loss situation.

[Andromeda]

Hi Michael

Ring fencing applies to types of income / profits, not really to units. In other words rental income and salary, not different rental units.

Unless you paid significant provisional tax, SARS will not need to refund you. The tax you pay is on profit and no profit means no tax. A significant loss is merely offset against future profits in total. In other words your rental income is a figure and your rental loss can be figure; you can't actually have both because the total is the sum of everything.

[Michael Stolman]

Hi there Andromeda, thanks very much for the info. Just a bit of feedback.
I pay provisional tax every month by default to ensure that SARS always owes me which SARS seems to be happy with as I then do not submit interim provisional tax returns which is another hassle having to do these during the year as well and having submitted my return yesterday, I am being refunded all the tax I paid in but I am still losing out a bit on further expenses I have incurred which could have been offset against profits in the future.

Some time back SARS issued a unique number covering the 3 properties as a single trade. I see in the latest return they again ask the question where one can then select 3 separate trades which I would guess cold then lead to losses being ring fenced to offset against future profits.
The question is can on switch between being a single trade and then 3 separate trades when convenient to allow for ring fencing?
Next question is, I would guess that ring fencing is a distinct advantage to me where the additional expenses could then be applied to future profits?

[Andromeda]

Hi Michael

I have enclosed the SARS Guide on ring fencing. Personally I would expect that they will always regard the rentals as separate business activities, because of different acquisition dates, different tenants and different CGIT possibilities.

Each unique activity should end up with a retained income or accumulated loss. The accumulated loss represents expenses that may be offset against and future profit of that activity. If that is not being done then it means that SARS have disallowed an expense. Similarly they should be taxing you on a net income for those unique numbers that result in a profit, equal to what you submitted.

I have sent you a PM with details of who might better assist you.LAPD-IT-G04-Guide-on-the-Ring-Fencing-of-Assessed-Losses-Arising-from-Certain-Trades-Conducted-b.pdf