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Is registering a second bond in order to reduce rental income tax legal?

Posted 7 November 2013 under Tax Questions



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I own two properties. Property A is my primary residence, and is bonded for R700k. Property B is a rental property, is valued at R1m and is bonded for R500k. I make a rental profit from Property B after deducting the loan interest and all other deductible expenses, and thus pay tax on that net income. My idea is to register a second bond on Property B for an additional R500k, and transfer that money into the bond of Property A. The increased interest paid on the combined bonds of Property B would then result in me making a net rental loss, and thus no tax will be payable. In addition, the interest rate on Property B's bond is better than on Property A, thereby giving me a saving on interest as well. Would this be deemed legal in case of a SARS audit?

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TaxTimTaxTim says:
8 November 2013 at 9:45

You are entitled to register bonds as you wish and leverage interest rates off one another if that is financially more acceptable. If you had done all this at the beginning of the transaction then it would have been ok, SARS should not have a problem with this as you are merely borrowing money to pay off another debt. However the rules around Tax Avoidance and planning to avoid tax are very strict and basically you cannot enter into any transaction whereby the sole or main reason is to avoid tax or reduce your liability outside of the provisions of the ACT. So in your case, the financial reasons, being the better interest rate should be the primary reason for your entering into this transaction.


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