Tax benefits of real estate investment

Investing in property enables you to generate a passive income. In other words, you can earn an income without actively working for it.

The Income Tax Act (No 58 of 1962) contains details of a tax incentive in Section 13sex, offering South African taxpayers a significant tax benefit on residential property.

Under section 13sex of the Income Tax Act No. 58 of 1962, the South African Revenue Service (SARS) grants a considerable tax advantage to taxpayers who purchase new and unused residential units or improve any residential unit purchased on or built after 21 October 2008.

The aim is to incentivise investors to buy investment properties to supply accommodation and, in return, receive back a percentage of the purchase price.

It's important to note that this tax incentive is a deduction against your personal income tax. SARS is not offering taxpayers a cashback. However, you will be paying less tax.

Requirements

These are the requirements to qualify for this tax incentive:

• The investor must own at least five residential properties. They don't have to be acquired simultaneously, but the tax incentive will only apply once the investor has taken transfer of all five properties.
• SARS requires one person - or one entity - with one tax number to be the owner of the five properties.
• All five units must be used for rental purposes. In other words, the owner and his family may not occupy these units.
• All units must be in South Africa.
• The investment properties must be new and unused, so the owner - or his rental agent - must be the first to place a tenant in these units. Effectively, this means that the owner must buy a unit from a developer in a new complex.

Properties

SARS looks at two different types of properties in two different ways. You can decide which option will best fit your portfolio in terms of the tax incentive.

Sectional title

You don't own the land the property is built upon, and property walls are shared with your neighbours. Everything inside the walls of your sectional title unit belongs to you. This mainly applies to flats and townhouses, or duplexes. SARS will allow you 55% back on the property's purchase price, claimed back over 20 years.

Full title

In this type of property, you own the building and the land. Taxpayers may only claim the building portion of the property as the land it is built on is not deemed to depreciate. Depending on the cost of the land, you may claim up to 80% of the building cost. This is also claimed back over 20 years.

Refund

If you sell one or more of the five properties before the end of the 20-year claiming period, you will be required to repay SARS some of the tax you have claimed. A professional tax advisor will need to help you calculate the amount due.

To take full advantage of Section 13sex, keep in mind that property should be purchased as a long-term investment to provide optimum tax relief.