How to get those rental deductions

In the first year of renting, the property made a small profit, and like the good honest chap that I am, I declared this rental income to Sars and duly paid my tax thereon.

However, the problem came in the following year, when interest rates went up resulting in a small loss being sustained: Sars disallowed the rental loss as a deduction against my other income. Bearing in mind that section 20A had not yet been enacted (and even if it had, the ring-fencing provisions would not have applied in my case since I was not on the maximum marginal rate of tax), I speedily sent off an objection to my local Sars office.

About two weeks later, a colossal document arrived in the post from Sars, asking for supporting documents and vouchers to support any other expenditure I was claiming. These things I had. What I didn’t have was the workings in support of my “feasibility study” when I purchased the property, indicating that the property would be a viable trade – for the simple reason that I hadn’t done one.

The other problem I faced was that Sars also wanted to know what my “intention” was when I purchased the property. “Trade” was certainly not my intention at the time of purchase – our plan was to live in the property as our primary residence. Renting only entered our minds when we were about to move into the new place and realised that we couldn’t get the old place sold.

Deciding that it was not worth launching a full-scale attack on Sars for what amounted to around R350 in tax, I decided to let the whole matter drop and pay the tax owed. We eventually managed to sell the property a year later.

But what went wrong? Why did our tax affairs concerning the rental of this property end up in tears? More importantly, what can you do to make sure that you can claim the deductions and/or losses to which you are entitled?

1. Make your intention clear from the start. For you to be carrying on a trade for tax purposes, there must be a clear intention to carry on such a trade. The courts have held that one’s intention may change, but then it needs to be a clear intention, not just a snap decision made in the face of an impending cash flow crisis.

2. Do a proper feasibility study. For property investments, this need not be complicated. On the income side, conduct a survey of property rentals in your area, supported by estate agent reports and/or newspaper clippings, and ideally including an indication of the likely direction of future rentals. Add to this a spreadsheet indicating anticipated income and expenditure on the property over the next five years, and you should be covered. After all, you would surely do this with any other business venture, and your property investments should be no different.

3. Keep all supporting documents such as copies of lease agreements, bond statements, and vouchers supporting any expenses claimed. While in our case we had a file containing all of these documents, subsequent experience with clients who have rental properties has proved that many people do not keep their paperwork in order. Sars has the legal right to call for proof of any expenses for up to five years after the date of assessment, and will disallow any unsupported claims.

4. Separate your rental property affairs from your primary residence. In last week’s column, I spoke about what happens when you draw down against your access bond facility. If you are going to use your facility on your residence to finance your rental property investment, make sure that this is clearly documented in all relevant documentation (sale agreement, bank documents, correspondence with attorneys, etc).

TAXtalk: www.taxtalk.co.za

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