On buy-to-let property, what can be deducted for tax?
Category Advice
Rowan Alexander, Director of Alexander Swart properties recently answered listeners' questions about buy-to-let property, during two sessions on Cape Talk radio. This confirmed his view that there are very few investment channels which rival residential property for the man-in-the-street.
"There was particular interest and questions from listeners, about the aspects of a property investment that are tax deductible," says Alexander. "This subject needs further exposure as a better understanding can make buy-to-let property much more attractive."
The first point to be grasped is that there are two distinct types of taxation on property investments. The first, Capital Gains Tax, which was introduced in the early 2000's, is not a separate tax but is included in the owner's Income Tax. It comes into play only when a property which was bought for investment, is disposed of/sold. It is tax on the investor's profit which is calculated by subtracting the purchase price and associated costs, from the selling price and disposal costs, such as the estate agent's fees.
The rate at which the tax is levied depends on what type of entity, e.g. trust, company or individual owner, the property is held in and will relate to the entity's current tax level. Individuals are taxed lower than trusts and companies.
Any additions or upgrades to the property can also be taken into account for deductions. It is therefore essential to keep a clear record, not just of the original purchase price, but also of all capital improvements. Receipts for expenses must be kept as this can make a substantial difference to the tax eventually paid.
Second investment property taxation is the income tax payable on the rental income. Here operating expenses are deductible. A quick test to determine whether an expense is one of an operating nature and therefore tax deductible, is that the owner will probably continue to pay this expense while paying off his investment and providing a satisfactory service to his tenant.
Those aspects which are tax deductible include:
- Interest paid on the mortgage bond or the loan incurred to purchase the property.
- Repair and maintenance costs, such as structural, plumbing, roofing, floor, window or paint work. A good buy-to-let investor, adds Alexander, will spend about 10% of his rental income on keeping the property in a good state.
- Costs related to ownership, e.g. insurance, levies, property taxes and security.
- Letting agency fees.
"In our experience buy-to-let investors sometimes pay more tax than they should because they have failed to keep good records of their operating expenses. This is a tragic waste of money" states Alexander.
For further information contact Rowan Alexander on cell phone number 082 581 3116 or email rowan@asproperty.co.za.
Author: Independent Author
