Rental tax deductions

David Warneke* Tax expert explains whether you can claim a tax loss if your rental property doesn't cover the bond.


If we have a property and we are currently renting it out but the rental is not enough to cover the bond, can we claim for a tax loss from the taxman for the shortfalls?


The loss can be claimed provided the property owner has made, as a minimum, a genuine attempt to let the property. However, where the owner is an individual, in certain instances rental losses are ‘ring-fenced', meaning that the losses may not be set off against other types of income, for example salary income.

The loss will be ring-fenced if losses are made for three out of five tax years or if the tenants, for more than half of the tax year, are relatives of the property owner. The ring-fencing will not apply if the owner can show a reasonable prospect of a profit. However, where losses are incurred for six or more years out of ten, the owner cannot use the reasonable prospect of a profit test.

There are many things that property owners should know about rental property and tax.

Firstly, there is a big difference for tax purposes between a repair and an improvement. An improvement creates a better asset whereas a repair restores the asset to its original condition. Repairs are tax deductible and improvements are not.

Secondly, if a property owner renovates a house and then sells it, and repeats this pattern of renovating then selling enough times, the South African Revenue Services (SARS) will view the profits from the property sales as being on revenue account and the seller will be taxed on the profits at his or her marginal tax rate. In this case the profits will not be regarded as capital gains. Unfortunately, there is no guide on the number of times that one has to do this before the profits are seen as revenue. The test comes down to intention of the taxpayer: whether each individual property was purchased for speculation or for investment.

Thirdly, expenditures on certain types of property improvements will not be allowed for capital gains tax purposes: for example, the cost of any improvements not reflected in the property at the time of the sale. The Income Tax Act specifically states that these costs must be disregarded. Therefore, if the owner owns a flat for 15 years and during that time renovates the kitchen twice, the cost of the first renovation does not qualify as an expense for capital gains tax (CGT) purposes when the flat is sold.

*David Warneke is a tax partner at Cameron & Prentice Chartered Accountants.

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