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Rental income tax guide

Posted under Guides

Do I need to Pay tax on my rental income?

 

If you earn income from renting out a property, or even subletting a room in your home, you need to pay tax on it. It doesn’t matter if it’s your only source of income, or supplementing a salary you receive, this rental income must be declared to SARS.

It’s also worth knowing that if your taxable profit on your rental income (rent less expenses)  is more than R30 000 a year, this could mean that you may have to register as a Provisional Taxpayer and pay tax twice a year via the provisional tax system. Not sure if you’re a provisional taxpayer? Use our handy guide.

Rental of residential accommodation includes all of the below:

  • AirBnB
  • holiday homes
  • bed-and-breakfasts
  • guesthouses
  • sub-renting part of your house e.g. a room or a garden flat
  • residential dwellings  

How is tax calculated on rental income?

All income you receive from rentals should be added on to any other taxable income you earn.

Not only is the monthly rental income subject to tax, but any amount paid to you over and above the monthly rental is too. This could include things like a lease premium, which is a non-refundable lump sum paid by the tenant to the owner or rental agent when they sign the tenancy agreement. Here the full amount is subject to tax in the year that it’s received or accumulated.

On the other hand, a rental deposit is returned to the tenant at the end of their tenancy so it isn’t taxable income and should not be declared in the owner's tax return. It will only become taxable income if the deposit is used by you (for repairs for example) and therefore not paid back to your tenant.


Tax Deductions for your Rental

Luckily you can deduct expenses you incurred during the rental of your property from your taxable rental income, reducing the tax you need to pay. This doesn’t include any capital and/or private expenses, as SARS won’t allow those as a deduction. Capital expenses (i.e. assets you’ve purchased that cost more than R7000) may be subject to a wear and tear deduction – see our wear and tear calculator for more information.

Renting out your property, whether it’s a house, apartment, AirBnB or even a room in your house, is like running your own small business. All your income and expenses must be reported in the Local Rental Income section of your tax return form.

Not sure which expenses you can claim while renting out your property? Here’s more on that.

Monthly costs you can claim:        

  • Electricity
  • Rates & taxes
  • Water
  • Levies to the local municipality
  • AirBnB agent’s & rental agent fees
  • Accountant’s fee

Other costs you can claim:

  • bond interest (SARS allows only the interest to be deducted against the rental income, not the larger bond/mortgage/capital repayment)
  • advertising costs
  • insurance (this is for the property itself, not household contents)
  • garden services
  • security and property levies
  • wear and tear on furniture
  • repairs and maintenance

 

NOTE: Repairs and maintenance mustn’t be confused with home improvements or renovations, as the latter is not tax deductible. A repair is when something is restored to its original (i.e good) condition, such as:

 

  • Refurbishing a wooden floor
  • Repainting a wall or ceiling
  • Repairing existing plumbing & electrical wiring
  • Repairing appliances such as a fridge or washing machine
  • Roof repairs
  • Replacing door handles
  • Replacing a window
  • Replacing broken tiles

 

Want another great way of reducing tax on your rental income?

You can reduce your rental income tax by depreciating the furniture you have inside your rental property. So, if your house is decked out with beds, couches, dining room tables, coffee tables and electronics that would need to be replaced eventually (and lead to a future cost), SARS allows you to deduct a percentage of these costs each year. This is called “depreciation” and can be declared as such in the Local Rental Income section, which will help reduce the tax on your rental income.

If you’d like to check out what you can “depreciate”, click here to calculate your depreciation with our Wear and Tear calculator.

Note that as a general rule of thumb, assets with a purchase price higher than R7000 are capitalised and depreciated over several years, while individual items costing less than R7000 are written-off /expensed in the year they’re purchased.

 

Which expenses are "not" allowed?

Home Improvements

A home improvement is an update to your property that did not exist before you bought the property, or it’s something that will extend or improve the life of the property. Home improvements are not just a short-term fix, but rather something that will increase the income earning capacity of the property and add value to the property when it’s sold one day (e.g. like adding on an additional room).

Home improvements can be considered as more extensive and expensive than repairs. Some examples of home improvements include:

  • Installing an air conditioning system
  • Renovating a kitchen
  • Installing a security system
  • Installing a swimming pool
  • Renovating a bathroom
  • Adding a deck
  • Adding or extending the property

While you can’t deduct these costs against your taxable rental income, they are added to the base cost of the property and will reduce your Capital Gains Tax when you sell the property eventually. See our Capital Gains calculator here. So be sure to keep all invoices for these costs you incurred, as SARS may need to see them one day!

VAT

When it comes to VAT expense claims, the supply of a “dwelling” is an exempt supply for VAT purposes, and you can’t deduct VAT incurred on these expenses.

 

How do I deduct rental expenses?

When less than 100% of your property is being rented out, then you may only deduct a portion of your rental related expenses. This portion (i.e. percentage) is calculated by dividing the floor area of the space being rented, by the total floor area of the property (including garages and out buildings).

Here’s an example:

You have a 500 square metre, three-bedroom home which also has a separate flatlet which you rent out on AirBnB for 250 days of the tax year. You will then take the total square meterage of the flatlet (let’s say this is 180 square metres) and divide that by the total of the house (include garage and outbuildings) to get the percentage.

Square meterage of flatlet/ total square meterage of property x 100

180/500 x 100 = 36%

Now that we have the percentage worked out, let’s say your rental income was R 70 000 in the last tax year. How much of your expenses can you deduct?

Expenses

Total annual expenditure in tax year

Allocated expense to the rental property (36%)

Rates and taxes

 R 22 600

 R 8136

Interest on bond

 R 30 000

 R10 800

Security

 R 6000

 R 2160

Garden services

 R 30 000

 R10 800

Advertisements *

 R 4 000

 R4 000

Property insurance

 R 12 000

 R 4320

Repairs & maintenance to flatlet *

 R 8 000

 R 8 000

Total expenses

 R 112 600

 R 48 216

*100% of these costs would be deductible.

The allocated expenses would then need to be pro-rated based on the days occupancy in a year, i.e. 250 days

Total rental expenses: R48 216 x 250/365 = R33 024

Net taxable rental income: R70 000 – R33 024 = R36 975


How do I declare rental income on my tax return?

When you’re filling out your ITR12 on eFiling, you need to click yes to the question asking “Did you derive income from the letting of fixed property(ies)? It will then open up the local rental income section on your ITR12, which you can fill out and submit.

When filling out the income derived from any rental properties, it’s incorrect to only declare the net value of the rental income received. You will need to insert the gross (total) value of rental income received and then enter in your applicable expenses like interest, insurance, rates and taxes.

There is also a field for the description of your rental property. This is merely a description of the area or property that you’re leasing, for example: Rental of my garden cottage at 3 Newlands Avenue, Newlands.

There is also a field for the ‘Unique Identifier’. If you haven’t declared rental income before, you can leave this field blank. But if you did declare rental income for this property last year, check your prior year ITA34 (assessment) for the unique identifier and then copy over this number to the relevant field in your current year tax return.

If you’re using TaxTim, we’ll ask you a series of easy questions and fill this out automatically for you.


FAQ

What if the expenses exceed the rental income?

If your expenses exceed your rental income, this loss should be offset against other income earned by the homeowner, provided that losses are not “ring-fenced” by SARS in terms of prevailing anti-avoidance provisions. “Ring-fencing” means that SARS will carry this loss over to the next tax year and offset it against your rental income, and won’t offset it against salary income in this tax year for example. See our guide on ring-fencing of assessed losses arising from trade conducted by individuals for more clarity.

Homeowners must be able to satisfy SARS that they are carrying on a real trade by renting out their property.


What if I’m renting out more than one property?

If you’re renting out more than one property and earning rental income from each, then you need to declare each rental property one at a time (i.e don’t add them all together). SARS wants to see the incomes and expenses for each property separately.

 

What if one of my rental properties makes a profit and the other makes a loss?

SARS still wants you to declare each property separately. You may not pay a lot of tax because the loss will get set off against the profit, but you should still tell SARS about each one separately.

 

What happens if my tenant won’t pay me the rent they owe me? Do I still tell SARS?

If your tenant has not paid you the rent money they owe you, you have two options:

  • Include the amount/s in the rental income you declare and then indicate that you have bad debt/s for this amount.
  • Do not include this rental income in your tax return and do not include it under bad debts either.


What if I own the property with someone else, how do I declare the rental income and expenses?

If you own the property with a husband, wife, friend or business partner, and you each own a % of it, then you would need to either:

 

  • use that percentage and apply it to the incomes and expenses included in your tax return so that you only declare your % share of the rental income and expenses or,
  • indicate that you’re part of a partnership, and then provide the partnership details in your tax return (i.e. that x person owns x% of the property and you own the other x%). You then need to declare 100% of the rental income and expenses and SARS will allocate your share of the rental income and expenses based on the partnership % you indicated.


Can I deduct my own expenses from my rental income?

You unfortunately can’t claim a deduction for your personal expenses against your rental income.


Can I deduct my bond instalment from my rental income?

Bond instalments are not regarded as an expense when it comes to your rental income. You can however claim a deduction for the interest on your bond instalment.


I pay the gardener that works at my rental property, can I claim it?

Yes, you can claim this expense against your rental income.


Can I claim a deduction for the costs I paid the agent to find a tenant for my rental property?

Yes, you can claim a deduction, as long as you have proof of this transaction.