- Gross rent = nett rent?
- Deductible expenses
- Proof, proof, proof!
- Cost vs capital improvements
- Plan of action
It is common sense for tenants and homeowners that a rental property is much more than just collecting rent and finding people to stay there.
It is a process that requires time, effort, and sometimes a little bit more money that you would have liked to spend.
One thing many landlords forget to do is to keep records for their income tax purposes.
In fact, what many landlords don’t even realize is that SARS requires you to calculate your expenses and profits in relation to the properties you own and to pay tax on the profit you make:
Gross rent = nett rent?
Most people think they can simply keep the rent as it comes in every month without even considering SARS, especially if they breakeven on rent every month. This is actually a violation of the Income Tax Act.
SARS demands a percentage of any type of rental income – whether it is a family home where there are permanent tenants, or whether it is a holiday home that you are renting out for a weekend.
Even if it is a cottage that is standing on your property and you use it as a rental, you could land yourself in hot water if the Receiver of Income is not paid.
Luckily, there is a bright side to all of this.
Rental property owners need to be aware of the fact that there are certain expenses that can be deducted from the gross rental to determine the actual profit and reduce the amount of tax payable to SARS.
These expenses are costs that are incurred during the rental of the unit like municipal rates and taxes, interest paid on the mortgage, the cost of advertising for new tenants, fees paid to the managing agent, insurance premiums, the cost of repairs and maintenance, and the cost of garden and security services.
Proof, proof, proof!
Landlords who want to claim these expenses must submit proof of everything in the form of invoices, receipts, and statements from their banks and insurance companies. These supporting documents should be filed at the beginning of the financial year.
Landlords should also be aware that they cannot charge VAT on the rent that they receive. They can also not claim VAT on anything that they have spent on the property.
Cost vs capital improvements
If the landlord decides to renovate the home or improve the building itself, for example, add an additional garage, such expenses cannot be claimed against the rental income received.
However, not all is lost. It could be included in the base cost of the property to effectively reduce the owner’s capital gains liability if the property is ever sold to another buyer.
As with all homes and buildings, renovations and improvements are seen as part of the entire asset of the house. It is not something that will fluctuate from a month to month basis – it forms part of the house itself and should be treated as a global asset.
Plan of action
Investors and landlords who did not have access to this information should act immediately.
They should approach SARS immediately to discuss their rental income declarations for the past tax seasons. It is better to come clean as soon as possible rather to wait and see what happens. You will have to pay a penalty fee, but that is better than being persecuted for tax evasion when they find out.
Taking the direct approach might even lead to a reduction in penalties which is better than letting it pile up before you sell it and sitting with a huge bill. It goes without saying that it is advisable to hire an accountant or tax expert to assist you in this process.