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Accounting for Residential Property Investments

The importance and level of accounting that is required for property investments will largely depend on the legal form of the property owner. The accounting requirements for corporate entities (companies and closed corporations) and trusts are more stringent than the accounting requirements for individuals. The level of accounting that is required if the property owner is an individual is determined more from an income tax perspective than from a regulatory accounting perspective. There are no accounting requirements for primary residences because the ownership of these properties is of a personal nature and therefore has no annual income tax effect. The investment in a primary residence is however deemed to be of a capital nature and it is therefore imperative that any capital costs that are incurred are accurately recorded because it could reduce the capital gains tax amount that will have to be paid when the property is sold.

Property & Income Tax

All the income and expenses (including interest charges) relating to buy to let properties need to be included in the taxable income of the property owner. The expenses and interest relating to primary residences cannot be deducted from the taxable income of the property owner.

Income tax rates differ based on the legal form of the property owner:

  • Individuals are taxed based on a sliding income scale
  • Companies & closed corporations are taxed at a fixed rate of 28%
  • Trusts are taxed at a fixed rate of 45%

For more guidance on property income tax, visit the Property Income Tax page of our website.

Capital gains tax is payable if a property that is situated anywhere in the world is sold by any South African resident or if a property that is situated in South Africa is sold by a foreigner citizen and a capital gain is realised on the disposal of the property. The capital gain or loss is calculated by deducting the base cost of the property from the selling price. The base cost of a property includes the property purchase price, transfer costs, selling costs and renovation costs. The capital gain must be included in the taxable income of the property owner in the year in which the property is sold. The Income Tax Act does provide for some relief - only 40% of the capital gain is included in taxable income if the property owner is an individual and 80% of the capital gain is included in taxable income if the property owner is a company, closed corporation or trust.

If the property is sold by an individual and was used as a primary residence, no capital gains tax is payable if the selling price is below R2 million. If the selling price is above R2 million, the first R2 million of the capital gain is exempt from capital gains tax. For more guidance on capital gains tax, visit the Capital Gains Tax page of our website.

Other Taxation Issues

The transfer duty that is levied on the acquisition of a property is calculated according to a sliding scale based on the property purchase price. Before 23 February 2011, the transfers duties applicable to corporate entities (companies & closed corporations) and trusts were calculated at a fixed rate (8%) but after this date, transfer duties are calculated on the same basis for corporate entities, trusts and individuals in accordance with the following sliding scale:

  • No transfer duty is payable on the first R900,000 of the property purchase price
  • Transfer duty of 3% is payable on the portion of the purchase price that falls between R900,000 and R1.25 million
  • Transfer duty of 6% is payable on the portion of the purchase price that falls between R1.25 million and R1.75 million
  • Transfer duty of 8% is payable on the portion of the purchase price that falls between R1.75 million and R2.25 million
  • Transfer duty of 11% is payable on the portion of the purchase price that falls between R2.25 million and R10 million
  • Transfer duty of 13% is payable on the portion of the purchase price that is above R10 million

Another taxation aspect of property investments that should be carefully considered is estate duties. If the property owner passes away and the property is registered in the individuals name, the market value of the property will be included in the deceased estate and could therefore result in a significant estate duty liability. If the property is registered in the name of a trust, company or closed corporation no estate duties will be incurred but note that the income tax and capital gains tax rates of these entities are higher than those of individuals. There is also a R3.5 million exemption from estate duty that is applicable to individuals which is based on the net asset value of the deceased estate. This means that if the net asset value (property market value less the outstanding bond amount) plus the net asset value of all other personal assets is less than the exclusion amount, no estate duties will be incurred. Estate planning can be quite complex and we recommended that professional advice is therefore obtained before purchasing a residential property (especially when purchasing an investment property).

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