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What Does Residential Property, Sex And Tax Have In Common?

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

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