According to our tax laws, the rental income received by an individual who rents out a property, is subject to income tax.
Rental of residential accommodation includes:
. holiday homes;
. bed-and-breakfast establishments;
. sub-renting part of your house e.g. a room or garden flat; and
. residential dwellings.
1. HOW IS IT TAXED?
1.1 Rental income/lease premium
You are obliged to add the monthly rental income you receive to the sum of your annual (taxable) income declared to SARS.
Any lease premium (an amount paid in addition to, or in lieu of rent for the for granting of the use or occupation of a property) is also subject to income tax in the hands of the homeowner as landlord. These premiums are usually paid in the form of lump sums at the commencement of the lease, and the full amount is subject to tax in the year that it accrues, or is received. (This is unlike rental income, which is paid and receipted monthly.)
1.2 Tenant’s deposit
Receipt of the tenant’s refundable deposit is not taxed in the hands of the homeowner (as it is not money ‘earned’ by the owner), provided it is kept separately in a trust account and is not used by the owner. However, if the tenant breaches the lease agreement and the deposit is, in terms of the provisions of the lease agreement, forfeited to the owner, then it becomes ‘income earned’ and must be included in your taxable income, in the year that it accrues to you.
2. POSSIBLE REDUCTIONS IN AMOUNT OF RENTAL
The amount of the rental income to be included in your income tax may be reduced by subtracting certain expenses incurred during the lease period and if the expenses were incurred ‘in the production of the rental income’. These include:
. rates and taxes;
. bond interest;
. agency fees of estate agents;
. insurance (only homeowners not household contents);
. garden services;
. repairs/maintenance in respect of the area let; and
. security and property levies.
Beware the fine distinction between repairs and maintenance on the one hand, and improvement and reconstruction on the other. Whilst repairs and maintenance may be subtracted from the amount of the rental income, improvement/construction expenses are capital in nature and are not allowed as a reduction in respect of rental income. (Improvement/construction expenses may however be included in the calculation of the base cost of the property, to reduce the capital gain (or loss) on the disposal of the property for capital gains tax purposes.)
3. A PRACTICAL EXAMPLE OF HOW TO DEDUCT EXPENSES, PROVIDED BY SARS ON ITS WEBSITE, ILLUSTRATES THE CALCULATION AS FOLLOWS:
Expenses must be apportioned where less than 100% of the property is rented out. The area which is let must be divided by the total area of the dwelling which includes garages and outbuildings.
Let’s look at the following example: Ms Jones lets two rooms within her main home on a bed-and-breakfast basis. Each bedroom has its own en-suite bathroom. The total area of the house (including garages and outbuildings) is 420 square metres, while the area which is let, is 120 square metres. The area let expressed as a percentage of the total area of the house, is 28.57% (120/420 x 100). Ms Jones’ total rental income for the 2012 tax year was R50 000:
Expenses apportioned to the area rented (28.75%)
Rates and taxes
R 9 600
R 2 743
R 10 000
R 2 857
R 2 000
Interest on bond
R 60 000
R 17 142
R 1 000
R 1 000
R 6 000
R 1 714
Improvements to garage (Note2)
R 5 000
Repairs in respect of the area let – water damaged carpets (Note3)
R 12 000
R 12 000
R 105 600
R 38 027
. Advertisements incurred 100% in production of rental income.
. Improvements to garage are capital/private expenses (not incurred in production of rental income) therefore no expenses allowed as a deduction.
. Replacement of water damaged carpets is incurred in production of rental income (therefore allowed as a deduction).
. Nett expenses to be set off against rental income is, R50 000 less R38 027= R11 972.68 (rental profit).
. Source code for rental profit is 4210 and rental loss is 4211.
. Profit/loss to be split 50:50 when married in community of property. Note that the full amount after expenses must be reflected. SARS will programmatically apportion 50:50.
For more information and assistance, contact Martin Sheard at MartinS@stbb.co.za or at 021 673 4700.