Deciding to rent out your property, or just a room in your home, can be a lucrative choice, but it's more than just finding the perfect tenant. If you own a rental property portfolio that generates income, you need to pay taxes to the South African Revenue Service (SARS). While you must report all taxable income on your tax return, there are ways to reduce the financial burden of rental income tax.
Let us guide you through the details of rental income tax implications, and how to reduce tax on your rental income to save you some money.
Rental Income Tax Deductions
You must declare the total rental amount as part of your taxable income when you earn rental income. However, you can make certain deductions, such as non-capital expenses. These unavoidable expenses are incurred while renting out your property. See a few examples below:
Non-capital expenses to offset Rental Income
- Rates, taxes, security, and property levies
- Interest paid on the home loan (if applicable)
- Advertising costs for marketing the property
- Rental agent’s commission or fees for securing a tenant
- Insurance (only homeowner’s insurance, not insurance for household contents)
- Garden services (if applicable)
- Repairs for the rented area (excluding improvements to the property)
By deducting these non-capital expenses from your tax return, you can reduce your taxable income, potentially placing you in a lower tax bracket, which will benefit you.
Tax Deductions for Partial Property Rentals
Bear in mind, that when you rent out less than 100% of the property, you need to divide the non-capital expenses accordingly. To do this, calculate the portion of your rental property by dividing the rented area by the total area of the property.
Practical example: Sipho rents out a room with an ensuite bathroom within his main home. The total area of his dwelling is 180m2, while the rented area is 60m2. The rented area accounts for 33.33% (60/180 x 100) of the total area. Sipho’s total rental income for the year was R60,000 (R5,000 per month). The table below shows the calculations.
|
Expenses |
Total Amount *examples only |
Expenses apportioned to the area rented (33.33%) *examples only |
|
Rates, taxes, security, and property levies |
R11,500 |
R3,832.95 |
|
Interest paid on the home loan |
R30,000 |
R9,999 |
|
Advertising costs (fully deductible) |
R1,200 |
R1,200 |
|
Rental agent’s commission or fees |
R900 |
R900 |
|
Insurance |
R7,000 |
R2,333.10 |
|
Garden services |
R3,600 |
R1,199.88 |
|
Repairs for the rented area (fully deductible) |
R4,000 |
R4,000 |
|
Total Expenses |
R58,200 |
R23,464.93 |
By deducting the apportioned non-capital expenses of R23,464.93 from his rental income of R60,000, Sipho’s taxable rental income is reduced to R36,535.07. This deduction saved him R23,464.93 in taxable income.
Expenses that cannot be deducted
It’s important to remember that you can’t deduct any expenses of a capital nature. This includes any costs incurred for renovations or additions to your property. Additionally, if you make repairs to the rental property after a tenant has moved out, in preparation to sell it, these expenses cannot be deducted since they did not take place while the tenant was occupying your property.
What happens when you make a net loss on your property rental?
To declare a net rental loss, you may need to consider the Income Tax Act’s ring-fencing provision, which applies based on your circumstances. The provision applies if:
- Your rental income exceeds a specific threshold.
- You incur losses from renting out property that exceeds your rental income.
- The rental income is considered passive or non-active, which may limit the deductions you can claim.
- You rent residential versus commercial properties, as different rules apply based on the type of rental activity.
If the provision does apply, you will not be able to offset your rental losses against income received from other sources.
Reminder - Tax evasion is illegal
Keep in mind that you are obligated to provide SARS with a record of the rental income received. It’s very easy for SARS to find any discrepancies in your tax return. If you’re found guilty of tax evasion after an audit, you could be facing a hefty penalty or worse – imprisonment.
When in doubt, reach out to a tax consultant
Trying to figure out what is tax deductible can be a difficult and overwhelming task. If you’re ever unsure about your tax return, it’s best to consult with a professional financial adviser or tax consultant who can guide you through the process. If you’re just starting your rental portfolio, reach out to your local real estate agent who can help you take the first step in your property search for the perfect investment.
