| |
|||||
 |
 |
 |
 |
 |
 |
|
|
||||||||||||
|
|
Accounting for Residential Property InvestmentsAs discussed under the Property Management section, the level of accounting required will largely depend on the nature of the legal entity which owns the buy to let property. We are not going to repeat all the issues mentioned under that section - the most important point to make is that there is a requirement to record all transactions relating to a buy to let property due to the income tax and accounting requirements relating to these properties. These requirements do not exist for primary residences as ownership of these properties is of a personal nature and therefore has no income tax effect. These assets are however deemed to be of a capital nature and it is therefore imperative that any capital expenditure relating to these properties is accurately recorded as it could reduce any capital gains tax liability incurred when the property is sold. Property & Income TaxAs mentioned above, all income and expenses relating to buy to let properties need to be taken into account for income tax purposes by the entity in whose name the property is registered. The income tax rates applicable are:
The income tax treatment of trusts could be quite complicated based on the nature of the trust, type of income earned, beneficiaries, etc. We recommend that professional advice is sought when setting up a trust. For more detail on Income Tax, click here. Capital gains tax is incurred when a property is sold by any South African resident or when properties situated in South Africa are sold by foreigners. The capital gain or loss is calculated by subtracting the base cost of the asset from the selling price. The base cost includes the property purchase price, transfer costs, agent commission and renovation costs. Only 25% of capital gains are included in an individual's income during the year in which the property is sold, while 50% of capital gains are included in the taxable income for corporations and trusts. A R16,000 annual exclusion applies to individuals. The first R1.5 million of a capital gain applicable to a primary residence is exempt from capital gains tax for individuals. Careful consideration should therefore be given before a primary residence is bought in the name of a legal entity as this exclusion would not apply. For more detail on Capital Gains Tax, click here. Other Considerations The transfer duty applicable on acquisition of a property also differs between individuals and corporations / trusts. A fixed percentage of 8% of the purchase price applies to corporates and trusts, while the following levels apply to individuals:
Estate duties applicable should be carefully considered when acquiring a property in one's own name or in a trust / company / closed corporation. The investor's intended investment period also plays an important role - if the intention is that a property will eventually be sold, it could lead to an increased capital gains tax liability when acquiring a property in a legal entity. There is also a R3.5 million exclusion on net assets applicable to individuals. 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 this amount, no estate duties will be levied. Estate planning could become very complex and it is therefore recommended that professional advice be obtained when considering the various holding structures. |
 |
|
