DID YOU KNOW ABOUT THIS TAX BENEFIT WHEN BUYING TO LET?
Buying-to-let has become a popular method of entrepreneurship especially for those who still prefer bricks and mortar to shares or cash as a way to grow their wealth or generate income. So, if the prospect of owning not one but many properties is not a daunting one, you may be joining the ranks of many buy-to-let investors who actively pursue this as a business.
The property market is full of investors who have dived into the booming business of buying to let. Not surprising, as the proportion of households who are renting increases, thereby creating opportunity for enterprising entrepreneurs to grow their property investment portfolios and their rental businesses. But it is a business that, for the misguided or those looking for a get-rich-quick scheme, can just as quickly be torpedoed by mismanagement, interest rate hikes or a market downturn.
There are signs that economic pressures may cause the property market to take a hiatus. Registered credit bureau TPN reports that while 86% of tenants nationally are in good standing, signs of weakening have started to appear (see graph). Predictably the cracks appeared in the upper value bracket (R25 000 per month plus) where tenants in good standing dropped from 81% in the first quarter of this year to 71% in the second quarter.
Caution aside, people require a roof over their heads and if rising interest rates and lending criteria results in fewer people purchasing their own properties, it stands to reason that rentals will continue to be in demand. According to TPN currently 61% of tenants rent properties that cost between R3 000 and R7 000 while 12% fall into the R7 000-R12 000 category.
But it is the level of demand that could change. The country has been through a period where demand for good quality properties outstripped supply and it has also seen an overabundance of developments resulting in a glut of properties available for rent. If, during a slump, a surplus of rental properties exists, the costs to rent could adjust. In order to retain or attract tenants whose wallets may be taking strain, landlords would invariably need to become more realistic about the yields they expect to generate and freeze or even lower their rentals. Rentals for non-primary residential accommodation like secondary home rentals or holiday lets are normally the first to suffer in an economic squeeze.
Whether in an upturn or downturn, location is key. The demand for well- located properties is likely to fare far better than those in little-known areas. Whether your property appreciates or depreciates in value is typically also augmented by location.
Yet, many buy-to-let investors who approach t his method of property acquirement from a business angle may be unaware of the tax benefits that could apply to them.
A taxpayer who owns at least f ive residential units in South Africa, which are used by the taxpayer for the sole purpose of his rental trade, may qualify for a deduction of 5% of the cost of the units, says Dr Beric Croome, tax executive at ENSafrica. “Thus, if an investor acquires at least five new and unused residential units or erects five residential units costing say R1m each – which do not need to be in the same place – and they let that out as part of their rental trade they would qualify for a deduction of 5% of R5m per annum of the units owned and
let out,” he says. “The 5% annual deduction is allowed over a period of 20 years if the owner keeps the building for that period and meets the requirements of the section.
“Clearly, if the building/unit is sold, the allowances previously claimed are recouped and any amount realised in excess of the cost of the property sold will attract capital gains tax where the taxpayer is an investor in fixed property and not a dealer therein,” cautions Croome.
The deduction is a higher 10% if the units fall into the category of lowcost housing, which are R300 000 for a stand-alone unit and R350 000 for an apartment. But, in terms of the Income Tax Act, rentals for low-cost housing are limited to 1% of the cost of the unit or apartment, says Croome.
But the devil is in the detail and the allowance applies to new and unused buildings acquired or erected. So, if a taxpayer acquires five ‘used’ residential units but then makes improvements to them, the allowance will then be based on the cost of the improvements effected, not on the cost of the used residential units.
Even with the possibility of a lull in the market there are scores of intrepid entrepreneurs who follow a path of cautious optimism and a long-term view and for which the buy-to-let market still holds value as a business.