Owning a rental property is a great way to earn a passive income which can add significantly to one’s monthly earnings, but potential investors need to know how this income is taxed.
A rental property that is well-positioned and well-maintained is an excellent asset and a sound investment, but Craig Hutchison, chief executive of Engel & Völkers Southern Africa, says rental incomes are subject to tax.
“The rental income is added to any other taxable income you receive, such as a monthly salary.” The taxable income can, however, be reduced. Hutchison says expenses associated with a rented property can be deducted from the income.
These expenses include:
- Bond interest
- Rates and taxes
- Property levies
- Estate agency fees
- Homeowner’s insurance (excludes household contents insurance)
- Garden services
Capital and private expenses, however, will not be considered as a deduction by SA Revenue Service. “While maintenance and repairs expenses can be passed on, improvement costs are a capital expense and will be included in the base cost of the property. When the property is sold, the improvement costs will be an expense that will effectively reduce the capital gain, thus reducing any capital gains tax payable.”
If expenses accrued from leasing a property exceed the rental income, the loss should be offset against other income received by the owner. These calculations are best worked out by professionals and will provide a realistic view of one’s net income.
“Income tax aside, the leasing of a residential property can be a viable and financially sound way of adding to your monthly income. At the same time, you own an asset that will appreciate in value and will pay dividends over time.”