How Sars ring fences a loss on rental properties

Does Sars ring fence a loss on rental properties by unique number (i.e. individual property owned), or do they combine all properties owned?

Response from David Warneke*

If the properties are part of a single trade, then they would be combined, but if they are in respect of different trades, then they would not. This would depend on the facts and circumstances of each case. For example, commercial letting may constitute a different trade to residential letting, depending, inter alia, on the purpose and modus operandi of the lessor.

When a provisional taxpayer declares on his yearly tax return, that he rents out three properties, Sars assigns a unique number to each individual property. The taxpayer then has to submit revenue and expenses by unique number every year. Let's say he makes a profit on two of them, but makes a loss on the third that negates the profit of the first two, thereby actually declaring a loss for his property rental portfolio. As I understand it, the loss is ring fenced, and cannot be offset against any other form of income the taxpayer earns.

DW: The loss would only be ring-fenced in a particular year if the taxpayer pays tax at the highest marginal rate and if either the taxpayer has incurred rental losses from that trade (refer comments above) for at least three out of the past five tax years or the trade comprises the letting of residential accommodation which is let out to relatives, and, in either case, the taxpayer cannot escape via the 'reasonable prospect of a profit within a reasonable period' exception.

What I am not certain of is whether the loss is ring fenced for the individual property or all the properties combined?

DW: This depends on whether the properties form part of a single trade or multiple trades.

Another question: How long will Sars tolerate a loss on the rental of properties? If one buys an investment property for the long term capital gain, the loss might continue for up to five years would this be acceptable?

DW: Unless the trade comprises the letting of residential accommodation and this is let out to relatives, in which case the losses are automatically ring-fenced, losses will only be ring-fenced if made in three out of the past five years. In either case, there is an escape via the 'reasonable prospect of a profit within a reasonable time' exception. Unfortunately, there is no certainty how long a 'reasonable time' is. It should be noted that if losses are made for six years out of ten, the 'reasonable prospect of a profit' exception falls away in the case of the letting of residential accommodation to relatives.

*David Warneke is a tax director at BDO Advisory Services (PTy) Ltd

Article from: www.realestateweb.co.za