Tips for getting rental deductions and staying on the right side of Sars
My fiancée and I currently have three properties, one being the primary residence, and two townhouses. The properties all have bonds.
We are renting the one townhouse - the bond repayment is higher than the rental income. We purchased the second townhouse on the strength of selling my grandmother's house and having her live there.
The idea is to settle the bond of this townhouse, but I have started to question whether this is financially viable?
Where you and your fiancé are leasing the first townhouse, you are regarded as trading for income tax purposes. This means that you and your fiancé (assuming that the property is registered in both of your names) will each be taxed on 50% of the rental income.
Similarly, each of you will be permitted to claim income tax deductions for 50% of the interest incurred on the bond, rates and taxes and repair cost relating to the property.
No tax deduction can be claimed for the bond repayments in that they are capital in nature.
If the income tax deductions exceed the rental income, a tax loss will arise in your hands which can be offset against other income. However, if both you and your fiancé are in the top marginal tax bracket, this loss may be ring-fenced by Sars as a suspect trade in terms of section 20A of the Income Tax Act, however, this is subject to the reasonable prospect of making a profit within a certain number of years.
In essence, there is no tax relief for the bond repayments, even, where the property is used for trading purposes.
In relation to the second townhouse, the position will be similar for tax purposes if your grandmother was to lease to property from you and your fiancé.
However, if this is not the case, you and your fiancé are not carrying on a trade for tax purposes which means that there is no taxable income, and as such, no income tax deductions are permitted. Again the capital amount of the bond repayment is not tax deductible.
Therefore, on the presumption that the second townhouse is not used for trading purposes, it makes financial sense to pay off the bond in full.
*Madeleine Schubert is from Shepstone & Wylie's Corporate and Commercial Law Department.
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