Rental property and tax

To answer all of your questions, let us first consider the tax treatment of rental income. Any rental income you receive should be added to any other taxable income you may have, and assessed in its entirety.

The taxable amount of rental income may, however, be reduced, as you may incur expenses during the period that the property was let. Only expenses incurred in the production of that rental income can be claimed. Any capital and/or private expenses won’t be allowed as a deduction.

Expenses that may be deducted from taxable income are your rates and taxes, interest on the bond, advertisements, fees paid to estate agents, homeowners insurance (not household contents), garden services, repairs in respect of the area let, and security and property levies.

It is important that maintenance and repairs should be noted as specific costs and not confused with improvement costs. Improvements are a capital expense and cannot be claimed as an expense. They can, however, be included in the base cost of the property to effectively reduce the capital gain (or loss) on the disposal of the property, for capital gains tax (CGT) purposes.

To answer your first question then, the municipal rates were paid as a lump sum amount of R30 000 in June 2015 on the sale of the house. Assuming that the property was still being let during the 2016 tax year that runs from March 2015 until February 2016, the seller would be able to deduct the full amount of R30 000 in the 2016 tax year.

On the second question, current legislation entitles individuals to disregard any capital gain on the disposal of their primary residence if the proceeds do not exceed R2 million. In such event the individual does not need to determine the base cost of the residence.

In order to claim this exclusion we need to determine what qualifies as a primary residence.

To meet the requirements, it must be a structure (including a boat, caravan or mobile home) which is used as a place of residence by an individual. An individual or special trust must own an interest in the residence. And the individual with an interest in the residence, beneficiary of the special trust, or spouse of that person or beneficiary must ordinarily reside in the home and use it mainly for domestic purposes as his or her ordinary residence.

The question in your case is what will happen to the CGT exclusion if you rent your residence out to a tenant for a period of time and then decide to sell the house?

A residence is treated as having been used for domestic purposes during any continuous period of absence, while the residence is being let under the following circumstances:

1) The residence must not be let for more than five years. You, your spouse or a beneficiary of a special trust must have resided in the residence for a continuous period of at least one year before and one year after the period of absence.

2) You treated no other residence as a primary residence during your absence.

3) You were temporarily absent from the Republic or employed or engaged in carrying on business in the Republic at a location further than 250km from the residence.