If you own a rental property, then this week’s top questions are specifically for you! Read on to find out more.
1. We paid off our home loan 5 years ago - nil balance due. However, we will have the loan available to borrow from as the term of the loan is not complete (we still have 90 months left). We would like to purchase an investment property and given that we have such a good rate on our current paid off home loan, we would like to use this loan to purchase the new investment property. Will we be able to deduct interest incurred on the loan against rental received from the investment property if the loan is in fact bonded against our home and not the investment property? Or would we have to take out a separate loan in order to deduct the interest cost? Note that the funds borrowed against the home loan would be able to be traced as having been used to pay for the new investment property as the funds will be transferred directly to the seller from the home loan.
A: Yes, you can use your current bond to buy a new property. Kindly ask your bank to give you a letter stating that the bond is for the new property, as this will allow you to claim the interest on the bond as an expense against your rental income.
2. I am considering selling a rental property but would like to know how I calculate capital gains tax on the sale of the property. During my ownership term of the rental property, I have already claimed various expenses in my annual tax returns. I assume that all these expenses will now be subtracted from the sale price to determine the actual profit (even though I have already claimed these as expenses over the lifetime of the property). Is this correct?
A: When calculating the capital gains tax, you unfortunately can't include expenses that you previously claimed against your rental income as they were previously allowed as a deduction against your rental income and hence you already received the tax benefit. If you have however, made renovations/improvements to your property which increased the income earning capacity of the property (for example, like adding an additional room) these will be dealt with as capital expenses. You need to add these capital expenses to the price that you initially paid for the house and then deduct this cost from your selling price to work out the capital gain. You can use our Capital Gains Tax Calculator for further help.
3. I bought an investment property in a KZN eco estate from a developer to rent out as a genuine business and the transfer has just gone through. I earned interest on the deposit while it was held by the attorneys up to date of transfer of R70 000. The property is now earning rental income of R20 000 per month, but the unit stood vacant for quite a while before getting a tenant and I had to pay occupational rent of R71 000 which was payable to the developer. There are other costs like levies, association joining fees, transfer fees incurred of about R50 000. My question is regarding the R70 000 interest - will it be and taxed on its own as interest? Or can it be combined with the rental income and all the expenses deducted?
A: You can deduct the occupational rent, levies and association joining fees against the rental income that you earned since the property was occupied. The transfer fees is a capital expense which is not deductible now, but must be added to the cost price of the property when you sell it one day (in order to reduce capital gains tax). You unfortunately can’t claim the interest as an expense against the rental income, as this is a separate transaction and should be declared as interest income (4201) on your tax return under the investment income section.
4. We rent out our holiday home and make a loss as the maintenance and interest is always more than the rental received. SARS has now decided to ‘ring fence’ this loss. What does this mean and do we have a choice as to how the loss should be treated? I am not sure when /if we will make a rental profit.
A: Ring-fencing the loss simply means that the amount gets carried over to the following year and can only be set off against income from the same trade i.e rental. While SARS does ask you on your tax return whether ‘the assessed loss should be ring-fenced’ or not, the decision isn’t ultimately yours to make, but that’s not to say an “assessed loss” is automatically ring-fenced either. The provisions of the Tax Act will determine whether the loss should be set off against income in the current tax year, or ring-fenced to be deducted from future profits from the same trade. This can get pretty complicated – fortunately, we have simplified this for you here