The value of owning a rental property; tax requirements to consider when investing

As interest rates continue to rise (hitting a 14 year high at 8.25%) and challenging economic conditions prevail, home buying has slowed, according to Antonie Goosen, Principal and Owner of Meridian Realty.

In May, the South African Reserve Bank's Monetary Policy Committee raised the repo rate by a further 50 basis points to 8.25%, leaving the prime lending rate at 11.75% - the highest it has been since 2009.

At the time, Samuel Seeff, chairman of the Seeff Property Group, said the decision by the SARB's Monetary Policy Committee, to hike the repo rate for the 10th time in just two years by another 50bps is a huge burden for consumers and homebuyers.

"The direct effect on homeowners and buyers is that the cost of borrowing has risen drastically over the last two years," said Seeff. 

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As a result of the 50bps interest rate hike in May, monthly bond repayments over a 20-year term will increase by approximately:

R750 000 bond - extra R259 from R7 869 to R8 128

R900 000 bond - extra R310 from R9 443 to R9 753

R1 000 000 bond - extra R344 from R10 493 to R10 837

R1 500 000 bond - extra R517 from R15 739 to R16 256

R2 000 000 bond - extra R689 from R20 985 to R21 674

R2 500 000 bond - extra R862 from R26 231 to R27 093

Unsurprised by the interest rate announcement, Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett, said the time if the announcement, that managing debt will become a challenge going forward. This interest rate hike might push many consumers beyond what they can afford. "We have already noticed the shift in the property market where we are receiving more enquiries from sellers and less interest from buyers. Every interest rate hike reduces consumers' spending power and their affordability levels get placed under further pressure. A hike like this is likely to cause activity within the property market to tighten even further," said Goslett.

Goslett advised that good real estate professionals should be strongly encouraging their buyers to get preapproval before starting the house hunting journey to make sure they avoid the disappointment of discovering that they are unable to afford their dream home.

READ: Buying an investment property to let | Here's what you need to know

The value of owning a rental property and tax requirements to consider when you decide to invest: 

Goosen goes onto say: "Many South Africans simply cannot afford to buy property and others do not want the commitment of owning a property. This is a far cry from the sellers' market we saw from 2020 to 2021 at the height of the Covid pandemic. People were scrambling to buy property and attaining favourable, low interest loans. Now, the opposite applies, many with flexi bonds cannot afford the sharp increase in monthly payments what with the increased cost of living and stagnant salary growth."

According to TPN's latest Rental Monitor released in May 2023, the third and fourth quarters of 2022 saw rental escalations increase from a national average of 3.02% to 3.56%. The report goes on to say that "property owners can expect rental growth to continue its upward trajectory in 2023 and 2024 if interest rates remain high". The report details how rising interest rates "act as a deterrent to home ownership" with an increasing number of households choosing to rent, increasing demand for rental stock, and ultimately driving rental escalations.

The report points out that as of Q4 2022 higher rental brackets are seeing enhanced rental growth. "Properties with rentals of more than R12 000 a month are seeing escalations of 4.38% followed by rentals between R7 000 and R12 000 per month which are growing at 4.16%. The lower end of the rental market - properties priced at between R3 000 and R7 000 per month - escalated at 3.2% while tenants paying less than R3000 per month saw escalations of 3.33%."

So now would be a good time to invest to rent, however investors must take all tax considerations into account and work with a trusted advisor to not only understand the tax implications of investing to rent, but also to manage the rental agreements, the property itself and the tenants.

Buying to rent can be a rewarding venture

Goosen says, that buying to rent can be a rewarding venture, providing passive income and potential appreciation in property value. He says, "There are various aspects of tax on rental incomes to consider when you (investors) are deciding to invest." He says one of the most important things an investor must consider when looking at deductions is the type of ownership of the property. He also says there are strategies that investors can implement to ease their tax burden and rental income.

The fact of the matter is rental income is subject to taxation and should be declared alongside other taxable income sources, such as salaries, wages, or dividends. The tax burden depends on how investor's structure the property ownership, whether it be personally, through a trust, or via a company.

Personal ownership means that net rental income after allowable expenses is added to your personal taxable income, potentially pushing you into a higher tax bracket. Purchasing a property through a trust can protect assets and offer tax benefits. Rental income generated by the trust may be taxed in the hands of the beneficiaries, potentially lowering the overall tax liability. Comparing personal income tax rates and corporate tax rates is essential when using a company to grow property portfolios. As a shareholder receiving dividends from a company, the effective tax rate of the rental income could be up to 40% after corporate and dividend withholding tax.

SARS allows property owners to reduce their tax liability by claiming deductions for certain expenses incurred during the property rental period.

Some of the deductible permissible expenses include:

• Rates and taxes
• Bond interest
• Advertisements
• Agent fees
• Homeowner's insurance
• Garden services
• Repairs and maintenance
• Security and property levies

READ: What you need to know before investing in buy-to-let residential property

However, deductions should be proportionate if only a part of the property is rented out. Furthermore, improvement costs (as opposed to repairs and maintenance) are not deductible but can help lower capital gains tax liability when selling the property.

Goosen says, "There are three key strategies I would encourage investors to follow to get the most out of their investment. First get professional advice, second do not try to skirt any of your obligations to SARS as a buy to rent investor, third, if you have evaded tax consider the Voluntary Disclosure Programme (VDP).

Consulting a tax specialist before renting out a property can provide a clear understanding of deductible expenses and potential tax liabilities. This knowledge will enable investors to make informed decisions about their rental property investment.

SARS recently emphasised the tax obligations of investors receiving rental income from hosting fee-paying guests. It is essential for investors to declare this income and claim appropriate deductions to avoid falling afoul of tax regulations. Non-compliant taxpayers may face audits, additional tax assessments, and penalties of up to 200% on the additional tax. Investors who have not declared rental income can regularise their affairs by applying for voluntary disclosure relief with SARS. If approved, only additional tax and interest will be imposed, avoiding penalties.

"Navigating the complexities of tax on rental incomes is essential for property investors looking to maximise returns on their investments. By understanding the tax implications, potential deductions, and the importance of compliance with SARS regulations, investors can make informed decisions and avoid unnecessary tax burdens," says Goosen.

With rental income a viable investment option in the current economic climate and all facts pointing toward a rental boom, building wealth through property investment is an achievable goal. Connecting with the right property professional with deep property, market and tax knowledge can reduce the risk of buy to let property purchases. With all the necessary facts on hand and all tax implications being carefully considered, rental income can prove fruitful for property investors in South Africa.

FICA

FICA has become an important aspect of our daily lives and also affects the selling and letting of property, and there are onerous requirements pertaining to FICA when it comes to property transactions.

Tiaan Pretorius, manager of Seeff Centurion, featured in an article in May explaining, that "FICA" is the abbreviation that is used to refer to the Financial Intelligence Centre Act of 38 of 2001 which was amended in 2017. It is part of a host of legislation aimed at assisting in the prevention of money laundering, fraud, tax evasion and identity theft.

Under the FIC Act property practitioners (estate agents) are specifically mentioned by name as being "reportable institutions" with various obligations with regard to FICA with responsibility around identification of their clients as well as having their own risk management  and compliance programmes.

Pretorius says estate agents must be able to verify and identify their clients. They also need to keep records of their clients while still being POPIA (Protection of Personal Information Act) compliant.

READ: Agents and clients | Safety measures to consider when selling and letting homes

The estate agency business for example must appoint a compliance officer, and register themselves with the FIC (Financial Intelligence Centre). It must also create its own risk and compliance programme and train its employees and agents on it. Estate agents are also obliged to report all transactions which meet the reporting threshold and those which appear to be suspect in nature.

The FICA requirements pertaining to verifying clients apply across the board, from sellers and buyers to landlords and tenants, he says further. The property practitioner will request clients to provide them with proof of their identity as well as proof of residence. Other documents that they can provide to assist in making sure their transactions proceed timeously are documents from SARS confirming their tax number and documents confirming their marriage status such as a marriage certificate if applicable. 

READ: Tax guide and property transaction | Everything you need to know

Other than it being a legal requirement that forms part of a property practitioners' duty, Pretorius says compliance with FICA also protects the agent and business. The wider impact is that it ensures protection for the local economy not to be black listed from using international financial systems, and reduces the capabilities of criminals and terrorists to use the formal economy and financial systems to continue to pose a danger to others.