“Owners – especially first-time buyers – need to be aware of their tax obligations and plan their property investments accordingly,” says Renier Kriek, Managing Director at Sentinel Homes.
Unfortunately, tax is often overlooked. Here’s an overview of what you need to know.
When you buy
When you buy a property, you will either pay VAT or transfer duty, but never both.
VAT is charged when a VAT-registered business sells a property, typically as a new residential development. Transfer duty, on the other hand, is levied when buying an existing residential property from its owner.
Importantly, transfer duty cannot usually be financed through a home loan, so you’ll have to come up with the money yourself. On higher priced properties, transfer duty can run into the hundreds of thousands.
“With a new property, VAT is included in the purchase price, so it is already covered by your loan,” says Kriek. “For first-time buyers, a new property can be much easier on their pockets.”
It’s also important, when shopping for property, to keep in mind that new properties are cheaper at the same advertised price than their second-hand competitors, due to the impact of the transfer duty.
For as long as you own
Once you take ownership of your property, you’ll immediately start paying municipal taxes. Whereas transfer duty and VAT are paid over to SARS, municipal taxes are used to fund city services, infrastructure and salaries.
“When planning to buy, you should consider how this tax will impact your monthly cash flow,” says Kriek. “We have, startlingly, had several clients who were surprised to learn that they will receive a monthly tax bill on their new home. The municipal tax is in addition to consumption charges for water and electricity and expenses like levies payable to the body corporate or homeowners’ association.”
When you sell
If you sell your property, you’ll pay capital gains tax (CGT). This is where things get a bit complicated.
CGT is calculated on the difference between what you paid for a property and what you’re selling it for. Individuals are taxed on 40% of this profit at their marginal tax rate when it comes time to declare their annual income to SARS.
However, if this is your primary residence (i.e. your home), the first R2 million of your profit is tax free.
There are a few catches though. For example, perhaps you initially rented out the property but then moved in to live there permanently before selling it. In that case, the R2 million allowance must be divided proportionately between the period you rented it out and the period you lived there. And you won’t be able to claim that first portion as tax free.
Another instance is where you claimed a deduction for a part of the property used for business, such as a home office. You will also have to subtract this part from the allowance.
Trusts and companies, on the other hand, pay tax on 80% of their capital gains and don’t benefit from a primary residence allowance. This seems, on the face, to provide valuable incentives not to own your primary residence through an entity. However, the estate duty implication and the effect on the cost of administering your estate should also play into the consideration of the correct structure.
Secondary properties, such as a holiday home, also don’t benefit, even if you do reside there occasionally.
When you pass
When you die, you will have to pay estate duty on the value of your estate above R3.5 million, rendered unto SARS by your estate administrator.
Any property disposed of at this time will attract CGT, and the same exclusion allowance is applied to your primary residence.
If your estate cannot cover your debt or tax obligations, your property may be sold to raise the necessary cash.
There are several methods to protect your property against such a loss. You could take out extra life insurance to cover the tax liability. Or, you could sell your property to an estate planning vehicle, such as a trust or a company, at the earliest opportunity, in order to cap your eventual tax liability.
Although you’ll pay CGT on the profit from that sale, any future property value increases will be on the balance sheet of the entity, not your own, thereby escaping an otherwise increasing estate tax liability. And since trusts and companies don’t die, you can avoid CGT in perpetuity when you do – to the advantage of your beneficiaries, of course.
When you earn income
If you earn income from any source other than employment, you must pay provisional tax. This includes income from renting out your property.
Provisional tax requires that you estimate your non-employment earnings for the year and pay tax on half of those earnings at the end of August, with the balance due at the end of February in that tax year. When you declare your total annual income, any provisional tax paid during the year is deducted from your assessed tax.
“Just estimating what you’ll earn in the coming year can be stressful and calls for the services of a professional tax advisor or accountant,” says Kriek.
Starting out right
The sheer complexity of tax on property and the methods of managing that obligation cannot be covered fully in a single article.
For this reason, it is essential to carefully plan your property purchases around both financing and tax. “Especially for high value property investments, such as total property values exceeding R2 million, you definitely need to engage the services of estate management and tax planning professionals,” says Kriek.