Investing for The Long-Haul in Property Could Bring You Added Tax Benefits

There are additional benefits to investing in property beyond the capital growth and fixed income elements that are normally associated with property investments.  Being patient and investing for the long-haul may also bring you a welcome tax break.
 
Hidden in the income tax act is section 13sex that provides a benefit for investors who are looking at a long-term investment horizon. These are investors who are not going to sell their investments at the earliest opportunity.  As long as an investor owns at least five residential units, he or she is entitled to a five percent yearly tax deduction of the cost price of new and unused residential units. This can, in certain circumstances, increase to a ten percent yearly tax deduction.
 
In addition, the investor must use these units in his trade, which more than likely would be the rental of the property.
 
When the units owned by the investor are ‘low-cost residential units’ as defined, the deduction will increase to ten percent. Low cost residential units are units with a cost of less than R350 000 and where the monthly rental charged is not more than one percent of the cost of each unit. This also includes a unit or units with a cost of less than R300 000 where the monthly rental does not exceed one percent of the cost of the unit, plus a proportional share of the cost of the land and bulk infrastructure.
 
The act provides for a ten percent increase per year of the cost on which the one percent is calculated, which effectively gives an owner the right to increase the rental by ten percent per year without losing the ‘low-cost’ status.
 
When improvements are made to the units, 30% of the cost of the improvement may be included in the amount used to calculate the yearly deduction, while 55% of the cost of the unit may be used in the calculation if only part of the unit is acquired by the taxpayer.
 
The five or ten percent deduction does not have to be apportioned for the period that the investor owns the units in a specific year, but the amount of the deduction claimed must be completed on the income tax return. (The return will not calculate the deduction itself).
 
For example, an investor purchasing five new residential units at R1 000 000 each, would be entitled to claim a R250 000 tax deduction on his tax return each year for 20 years - perfect for an investor looking to remain invested for a long period.
 
However, investors who are purchasing the properties with a view to making a quick profit if they get an attractive offer, must be wary of claiming this deduction. When a unit is sold, the deductions claimed under this section from the purchase date to the date of sale must be recouped and added to the taxable income of the investor in that year.  Effectively, this means that the investor must hand back all the deductions claimed in past periods on the unit that is sold.
 
This rule pours cold water on the incentive and should make the investor think carefully before deciding to claim the allowance.  Investors looking to make a quick profit from an investment in fixed property should steer well clear of the deduction, as a large portion of the gain made on the sale would be payable to SARS in the form of a recoupment.
 
If the investor has a long-term view and plans to remain invested in the units to benefit from the rental income and capital growth over an extended period, the deduction will provide welcome relief in the form of lower tax obligations for the periods that the properties are owned.
 
Contact Cornél, or speak to a Moore Stephens tax expert closest to you.