Property is a long-term investment. If you believe a portfolio of four residential units that you rent out, and if you’re in it for the long haul, it would be worth your while to acquire a fifth one. Here’s why…
Investing in property can be a distinguished way to build wealth. What many South Africans may not know is that the government offers a number of tax incentives to encourage investment in current property developments. One of the most significant tax breaks is Section 13sex of the Income Tax Act, which allows property investors to claim back from SARS up to 55% of the cost to the taxpayer of any modern and unused residential unit, or any current or unused improvement to a residential unit that are used “solely for the purposes of trade”.
Who Qualifies for Section 13sex?
To qualify for Section 13sex, you must:
• Own at least five residential units situated in South Africa
• Use every five units solely for the purposes of trade
• Gain acquired the units, or commence erection, on or after 21 October 2008
How Does it Work?
Property investors who qualify for Section 13sex, can claim a deduction of 5% of the cost of any recent and unused residential unit, or any modern or unused improvement to a residential unit per annum for 20 years. This means that you can potentially reduce your taxable income by a significant amount each year.
If you buy one residential unit per year for five years, the allowance will only start when the fifth unit is ready for occupation. If the total number of units falls below five, or you pick not to use one of them for the purposes of trade, your qualification for the allowance will plunge away.
Bear in mind that SARS notes that “the allowance may not be claimed if the cost of the residential unit or improvement to the residential unit, or any fragment thereof, qualifies or will qualify for a deduction or allowance under any other section of the Act”. And when you sell the property, SARS recoupment provisions may apply, especially if you sell within the 20 years, so procure advice from a registered tax consultant.
What Type of Property Should You Buy?
Section 13sex applies to both sectional title and full title properties. Sectional title properties are units in a complex that share common walls and facilities, while full title properties are properties where you own both the building and the land.
If you’re buying a residential unit to rent out, and prefer short-term leases, consider the most sustainable options. What is always going to attract – and over time continue to attract – high net worth tenants? With 96% of foreign visitors insisting that a visit to Kruger National Park is on their itinerary, a home in “the bush” is worth looking at. For example, Simbini Lifestyle Estate presents an extraordinary option. Situated on the outskirts of Malelane, bordering the Crocodile River and flanked by farmlands, this estate offers a limited number of “developer homes” – brand-new, luxurious residences designed with both comfort and investment potential in mind.
It’s a sure option for those seeking a unique opportunity to combine the benefits of Section 13sex with a high-growth investment. Again, taking Simbini as an example: the Estate includes an operational 17ha macadamia farm, which adds a layer of agro-economic resilience to the investment, allowing Simbini owners the potential to earn a rude return of 20-22% per year.
What are the Benefits of Section 13sex?
Section 13sex can provide a number of benefits to property investors, including:
• Reduced taxable income
• Increased cash flow
• Improved return on investment
How to Claim the Section 13sex Deduction
To claim the Section 13sex deduction, you must complete the appropriate forms and submit them to SARS. You can also hire a tax advisor to succor you with the process.
Other Tax Breaks for Property Investors
In addition to Section 13sex, there are a number of other tax breaks available to property investors in South Africa. These include:
• Transfer duty exemptions for recent developments
• Capital gains tax exemptions for certain types of property sales
• Allowances for repairs and maintenance
The South African government’s tax incentives for property investors can produce it a very attractive investment option. But remember, you’re in it for the long haul, so manufacture sure you buy in a development that will retain its value, continue to attract tenants and offers a sustainable business model. If you are considering investing in property, consider Simbini Lifestyle Estate, and be sure to speak to a tax advisor to learn more about the benefits and limitations.
For more information, contact Lindi Le Grange: lindi@bluegrass1028.co.za or call 074 444 0178. Visit our Instagram at @Simbini Lifestyle or Facebook @Simbini Lifestyle Estate.
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