Too many people invest their hard-earned money without any consideration of tax. Every investment has a tax implication and tax can seriously alter the realised return on investment. Paying less tax to the South African Revenue Service (SARS) means more of your investment returns make it to your pocket. Many people are completely unaware of the tax advantages of property investment. Property investing provides both income tax and capital gains tax (CGT) advantages.
Capital gains tax advantages
Capital gains refers to profit earned from selling an asset at a higher price than the purchase price. In general, capital gains are taxed at a lower effective rate than income tax or dividend tax. The maximum effective capital gains tax rate for individuals in South Africa is 18%. Real estate provides even more capital gains tax advantages.
If you invest R100 000 in the stock market and grow it to R1.5 million, the taxable capital gain would be R1.4m (R1.5m-R100k).
Assume you instead buy a R1 000 000 investment property with a 10% deposit of R100 000. When the property value increases to R1 500 000, your capital gain would only be R500 000 (R1.5m-R1m). Even though you have grown your R100 000 investment 15x, only R500 000 of that is taxable as a capital gain.
The key here is that SARS takes the purchase price of the asset as a starting point and not your original investment capital. Something else to think about here is you only needed the property value to increase by 50% by the time the loan is paid off to make 15x your money.
But that is not all. Property investment qualifies for even further tax benefits. SARS says investors may capitalize transaction costs such as the initial transfer fees, as well as renovation costs and marketing expenses. These costs are added to the R1 000 000 purchase price to form what is known as a base cost when calculating capital gains.
The following costs can be added to the base cost for the purpose of calculating capital gains tax: 1. Cost of effecting an improvement to or enhancement of the value of the asset
The remuneration of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal advisor, for services rendered
- Securities transfer tax, transfer duty or similar tax or duty
- Advertising costs to find a seller or to find a buyer
- Moving costs
- Installation costs including foundations and supporting structures
- Donations tax limited by a formula
- Cost of an option used to acquire or dispose of the asset
Assume you spent R60 000 on transfer fees to buy the property and R40 000 to market and sell the property, your capital gain calculation would look as follows:
If the property is your primary residence, you will not pay any tax at all in this example. SARS allows all South Africans a R2 million CGT exemption on the sale of a primary residence.
Income tax advantages
Property investors who own property in their personal name should know that all income from investment property is included in your overall taxable income and is taxable at your marginal tax rate. At first glance, this may appear to be a big disadvantage of property investment, especially for high-income earners. However, SARS views investment property as a business. This principle means all costs incurred to produce revenue may be deducted for tax purposes. Interest expenses on financing are an example of deductible expenses and will likely be the largest tax deduction in the early years.