Do I have to pay tax on my rental income?

I often get asked about Rental income and whether it is taxable. Let’s explore this topic.

Let’s first look at what is rental income.

If you rent out a property, generally residential accommodation and you receive rental income, then YES, the amount receive will be subject to income tax. 

Residential accommodation can include:

• Holiday homes
• Bed and breakfast establishments
• Guesthouse
• Renting a section of your home for example a room or a garden or granny flat
• Any dwelling or similar residential dwellings

Now that we know we need to pay income tax on rental income, let’s look at how tax on rental income is calculated.

The rental income you receive should be added to any other income you may have received. You can however reduce the rental income amount by certain expenses that are allowed by SARS.  If you receive any other income in the rental of your property in addition to the monthly rental, then these amounts will also be subject to income tax. These additional amounts of income received can include, for example rental that is paid in a lump sum at the start of the lease in which case the full amount is subject to tax in the year of assessment during which the income was received, not when the rent was due.

The rental deposit however does not need to include in the landlord’s gross income at the stage it was initially paid, if there is an obligation on you, the landlord to refund the deposit at a later stage.  The deposit generally only become gross income when the deposit is applied to you the landlord. In other words, you retain the deposit for damages or rental not received.

Can you reduce the Rental income?

Yes, the rental income may be reduced by any of the expenses that are permissible that occurred during the period that the property was let.  Only expenses that occurred in the production of the rental income can be claimed. Any capital and /or private expenses is not allowed as a deduction.

Which expenses are permissible?

• Rates and Taxes
• Bond interest (only the interest payment not the capital payment)
• Advertisements
• Estate agent agency fees
• Insurance (only homeowners’ insurance, not household content insurance)
• Garden services
• Repairs in respect of the area let
• Security
• Property levies.

 Which expenses are not allowed?

Any expenses that are capital in nature or that are not in the production of the rental income will not be allowed. This can include for example, cost for improvements made to the property. Improvements should not be confused with repairs and maintenance which are allowed as a deduction. Repairs and maintenance are when you attempt to restore your property (assets) to its original condition because of damage or deterioration. Improvements would usually result in the creation of a better asset, in other word upgrading your property (asset).  While improvements are not allowed as a deduction against rental income, the value of the improvement can be included in the base cost of the property, to effectively reduce the Capital gain or loss when you sell the property, and it comes to Capital Gains Tax.

Always consult your Tax Professional before using any information provided by an external party, including this article.  

For more information go to. https://www.sars.gov.za/types-of-tax/personal-income-tax/tax-on-rental-income/

Source: www.sars.gov.za

Author: Nicolene Hamaty – National Training Manager/Head of Training and Education at Century 21 South Africa

5 October 2021