Tax Returns | What homeowners need to know before filing.

Tax season is upon us, and individual taxpayers have until 23 October 2023 to submit their returns. For landlords and for those who work from home, this presents an opportunity to claim back for certain expenses.

While ordinary homeownership does not offer any tax benefits, owning a second home will affect an individual's tax return.

Landlords are required to declare the total amount of rental income received as part of their taxable income. They can lower that taxable income by making certain deductions of non-capital expenses.

What is meant by non-capital expenses, there are certain expenses that a landlord is obliged to incur when letting out a property. Examples of non-capital expenses include items such as:

• Rates, taxes, and property levies
• Security costs and garden services
• Interest paid on the home loan.
• Advertising costs of marketing the property and / or the rental agent's fees for securing a tenant
• Insurance (only homeowner's insurance, not household contents insurance)
• Repairs in respect of the area let (not applicable if the tenant has moved out and repairs are made to the home to sell it)

By deducting these expenses, landlords can lower how max tax is owed by lowering their taxable income. These expenses won't automatically reflect on your return, so it is important to take the time to submit these when filing your return. Be sure to keep all receipts on file in case SARS ever asks for proof of the expenses.

Another thing that won't automatically be included on an individual's tax return is the deduction for home office expenses (if it applies). a Tax-deduction can be made based on the interest charged on the outstanding bond amount if the individual is employed and a condition of the employment is to carry the cost of keeping a home office as the central business location.

It can be complicated to perform the necessary calculations for this deduction, especially if the homeowner withdraws an amount from the bond or makes a substantial additional payment towards the bond. It is recommended that homeowners consult with a professional tax consultant to help them work out this amount correctly.

It is important to work out any tax deductibles correctly, as there could be serious penalties if the return is submitted incorrectly. If there is ever any area of doubt, it is best to consult with a professional financial adviser or tax consultant who can provide assistance and guidance through the process. 

Rental income received from the letting of residential accommodation such as a holiday home, cottage on your property, sub-renting part of your house or a townhouse will all be subject to being taxed. The rental income is added to any other taxable income you receive, such as a monthly salary.

Can the taxable income be reduced?

Yes, the taxable income accrued from renting out a property can be reduced as expenses are always incurred.

Expenses that may be deducted from rental income include:

• Bond interest
• Rates and taxes
• Property levies
• Estate agency fees
• Homeowners insurance (excluding household contents insurance)
• Garden services
• Repairs
•  Security

 Which expenses are not allowed?

It must be noted that only expenses related to the rental of the property may be deducted. Capital and private expenses won't be considered as a deduction by SARS.

While maintenance and repairs expenses can be passed, 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 the capital gains tax payable to SARS.

If expenses exceed rental income

There are times when, for one reason or another, the expenses accrued from leasing a property exceed the income. The loss should then be off set against other income received by you the owner. When leasing out a property it is always best to consult with an accountant or tax specialist to fully understand what is deductible, how much tax will essentially be paid over the annual lease period, and the like. This will provide a realistic view of your net income.

Income tax aside, the leasing of a residential property, if managed effectively, is a viable and financially sound way of adding to your monthly income stream. At the same time, you are the owner of an asset that will appreciate in value over time and will pay dividends as the years go by.