Taxpayers who earn rental income from a second property of theirs often don’t know what they need to do when it comes to declaring this income to SARS. Sometimes taxpayers think that they don’t have to declare this extra income, or can hide it from SARS by not entering it on their tax return form - a big mistake!
The truth is that extra income earned from rental is taxable, and SARS needs to know about it. In some cases - if the amount earned (profit) outside of a salary is larger than R30,000 a year - this can put the taxpayer into a situation where they should register as a Provisional Taxpayer and need to start paying their taxes differently. However, declaring this income doesn't mean all is lost. There are a few things taxpayers can do to reduce the extra tax now owing.
Reducing Tax on Rental Income
Firstly it is important to remember that owning a property and renting it out is like running a business, albeit a much simpler one. Your business and its incomes and expenses must be described in the Local Business section of your ITR12 tax return form. Luckily any expenses incurred in earning the rental income can be declared within the relevant fields on the tax return form, reducing your total tax to be paid.
Electricity costs, water, rates and levies to the local municipality are monthly costs which can all be deducted. Even the rental agent’s fee and accountant’s costs can be taken off and reduce the overall tax payable. Essentially any expense associated with earning that income is deductible. The big expense each year is of course the interest paid on the bond or mortgage of that second property. SARS allows only the interest payment to be deducted against the rental income, not the much larger capital repayment amounts unfortunately.
Another great way of reducing the tax payable on the rental income is by depreciating furniture used within the property. If you have fitted it out with tables and chairs, beds etc, these items need to be replaced eventually, as damage builds up, and that will be a future cost to you. SARS allows you to "depreciate" these items now, in the years leading to their replacement, and this future cost can be declared as Depreciation in the Local Business section to help reduce tax payable now. Click here to calculate your depreciation (also called Wear and Tear) on certain items.
The basic rule should always be to tell SARS about the extra income you have earned, and then look for as many allowable expenses to reduce the extra tax. It's within the law, so use it!