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?