Investing in a residential property is part of a sound and diversified multi-generational investment strategy. It provides steady cash flow and returns that should comfortably exceed inflation over time. An often overlooked benefit of this investment is the associated tax breaks.
Apart from the standard deductions for business expenses, including property-related costs and interest paid, a residential property investor is entitled to claim a section 13sex residential building allowance – if certain requirements are met.
Section 13sex of the Income Tax Act was introduced after the 2008 recession to encourage residential property investments, increase the supply of housing in the country, and drive down the cost of home occupation for all South Africans.
The section allows for an income tax deduction of 5% (of the lesser of cost or market value) for any new and unused residential unit based on certain conditions. These are:
- The unit was acquired or constructed on or after 21 October 2008;
- It’s used by the investor solely for their trade;
- Providing the investor owns at least five residential units in South Africa.
The section allows an additional 5% deduction if it qualifies as a low-cost residential unit. To qualify as “low-cost,” the unit cost cannot exceed R350,000, and the monthly rental income cannot exceed 1% of the unit cost.
The Income Tax Act allows for inflation by permitting the unit cost to increase by 10% each year following the year in which the unit was brought into use.
In other words, investors can increase the monthly rental rate without losing low-cost status.
For the purposes of section 13sex, the residential unit cost does not include the following:
- The cost of the land on which the residential unit is constructed;
- The costs associated with preparing the land;
- Rezoning fees;
- Interest incurred to fund the acquisition, construction, or improvement of the residential unit.
If an investor acquires a residential unit that represents only a part of a building (e.g., an apartment), without doing any construction work or adding improvements, the cost, for the purposes of section 13sex, is deemed to be 55% of the acquisition price.
If the residential unit is only used for part of the year, the allowance is not allocated.
When an investor sells the unit, all the deductibles from the current or any previous year of assessment must be listed as income.
Let’s illustrate the benefits of section 13sex of the Income Tax Act with an example:
If an investor buys five new and unused residential units for R500,000 each, they will be allowed to claim an annual income tax deduction of R68,750.
The significant tax benefits of residential property investments enhance returns and make it worthwhile to engage in long-term investment. This strategy constitutes a wealth preservation asset that earns steady cash flow, supporting families well into the future.
The Family Wealth series is written by a team of generational wealth experts at Mosaic Financial Solutions. The aim of the series is to help families preserve wealth across generations. The team consists of specialists in the establishment and maintenance of local and offshore multigenerational financial inheritance structures.
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