tax deductions for residential propertyIt is not every day that these three 3 phrases are used in the same sentence! But in this instance there is actually method to the madness…

The South African Revenue Service (SARS) allows for a special tax deduction specifically on residential property, called a Section 13sex deduction. This is how it works:

You’re allowed to deduct an allowance of 5% of the cost * of any new and unused residential unit (or new and unused improvement to the unit) of,

  1. You own the unit,
  2. It is solely for trade purposes,
  3. It is situated in South Africa, and
  4. There are at least 5 units that are used for trade purposes.

How do I know what makes up the cost * of the unit?

The cost of the residential unit is the lesser of the direct cost to you in acquiring or erecting the residential units, or their market value.

If you buy residential units or improvements, instead of building the units or carrying out the improvements, the cost is reduced to:

  1. 55% of the acquisition cost, in case of a unit, and
  2. 30% of the acquisition cost in the case of improvements.

Important to remember that once you sell the residential unit/s, you lose the annual allowance but also that there is no recoupment when you sell a residential unit.

You may claim an additional 5% if the unit qualifies as a low-cost residential unit.

What is the definition of a “low-cost residential unit”

  1. An apartment qualifying as a residential unit in a building located in South Africa, where the cost of the apartment doesn’t exceed R250,000; and the owner of the apartment doesn’t charge a monthly rental of more than 1% of the cost, or
  2. The cost of the building doesn’t exceed R200,000; and the owner of the building doesn’t charge a monthly rental of more than 1% of the cost plus a proportionate share of the cost of the land and bulk infrastructure.

Important to take note that the cost on which the 1% is based, in both the above cases is deemed to be increased by 10% every year thereafter.

Let’s have a look at an example:

ABC Invest (Pty) Ltd purchased a block of 20 flats on 1 January 2012. The block of flats is not new and ABC Invest spent R1 Million per flat to upgrade them to standard. Subsequent the improvements, each flat was sold at a selling price of R4 million per unit.

David purchased 5 units and are leasing each unit at R12,000 p/m to his tenants.

David’s tax deduction on this specific transaction would be as follows:

Deemed Cost: R4 million x 5 units x 30% = R6,000,000

Therefor Sec 13sex deduction: R6,000,000 x 5% = R300,000 per tax year

If ABC Invest constructed the units from scratch and sold them to David as new and unused, his situation would change to the following:

Deemed Cost: R4 million x 5 units x 55% = R11,000,000

Therefor Sec 13sex deduction: R11,000,000 x 5% = R550,000 per tax year

6 Reasons To Look at Your Financial Reports
Making time to look over your financial reports each month is an important task for any business owner. If you are not taking the time to do this, either because you’re too busy, or perhaps you don’t really understand what you’re looking at and it doesn’t make sense to you, then here are 6 reasons […]
Your business deserves proper management accounts
For a moment, let’s think back to when we were kids and started to read for the first time…did we immediately start reading words?   No. it all started with pictures.   There is the age-old saying that reads: “A picture is worth a thousand words”.   Pictures created a visual reference point that over […]
Press Release: ThriveCFO launches debt recovery service
ThriveCFO is proud to announce that they are the first SA Based Accounting Firm that launches its very own, fully integrated debt management and collection service – Ultradebt (Pty) Ltd Having spent the last 6+ years in the corporate world and implementing different debt collecting methods & processes for these organizations, it was evident that […]

Become a Thriver. It will only take a minute.

No responses yet

Leave a Reply

Your email address will not be published.