Take advantage of tax incentives

Investors who purchase commercial or residential property from a developer within a proclaimed Urban Development Zone (UDZ), and subsequently let it out at market rates, may write off a portion of the purchase price against income.

Provided certain conditions are met, the so-called 'UDZ allowance' offers potential investors a significant incentive to purchase properties in these areas.

This is the view of Nate Taylor of Lew Geffen Sotheby's International Realty, who says that the tax incentive was introduced by government as a means of stimulating re-generation in areas suffering from urban decay.

The incentive applies to the erection or improvement of buildings or portions of buildings, and to the purchase of such buildings from a developer.

The advantage of the inner city

Noting that the municipality of Cape Town is a proclaimed Urban development zone, Taylor says: "The inner city of Cape Town — possibly unlike other urban areas in the country — is already a much sought-after area for property investors. Savvy investors will take advantage of the UDZ allowance to maximise their returns, provided they comply with the requirements of the legislation."

He notes that the most onerous of these requirements is that purchasers must use the building solely for the purposes of their trade.

However, the courts have interpreted the concept 'trade' to include, for example, the letting of the property at market prices.

He also notes that the incentive applies equally to sectional or fractional title ownership as it does to freehold title.

"There are several commercial and residential opportunities in Cape Town's UDZ area where an investor can purchase property directly from a developer and claim the tax incentive by letting out the property or, more conventionally, by running a business on the premises," says Taylor.

A win-win situation

"Take for example, the Oscar Pearse development — a new five-star luxury hotel in the CBD area, to be marketed by Lew Geffen Sotheby's International Realty. It's a second-hand building which has been improved by the developers, and investors who purchase sectional title directly from the developer will benefit from the tax incentive by virtue of the fact that the units will be rented out to tourists. The investor wins both ways — from the rental income to be generated as well as from the UDZ allowance," he says.

Taylor says that in the case of a building or part of a building purchased from a developer, 55 percent of the purchase price may be claimed in terms of the allowance if the building is a new building, and 30 percent in the case of a building improved by the developer. The UDZ allowance is allowed over a five-year period.

"While the benefits of the UDZ allowance are potentially significant, several requirements must be met before it can be claimed. It's always a good idea to discuss the issue with a property expert prior to making an investment," he concludes.

Article by: www.iafrica.com