tax on rental income
What is rental of residential accommodation?
If an individual rents out a property and gets a rental income, it will be subject to being taxed.
Rental of residential accommodation includes:
holiday homes
bed-and-breakfast establishments
guesthouses
sub-renting part of your house e.g. a room or a garden flat
dwelling houses and
other similar residential dwellings.
How is tax calculated on rental income?
The rental income you get should be added to any other taxable income you may have.
Any amount paid to you in addition to the monthly rental is also subject to income tax. These additional amounts or lease premiums are usually paid in the form of lump sums at the start of the lease and the full amount is subject to tax in the year that it accrues or is received.
The receipt or accrual of a rental deposit by a lessor need not be included in the lessor’s gross income at the stage of receipt or accrual if there is an unconditional obligation on the lessor to refund the deposit at a later stage. It will only become gross income when the deposit is applied by the lessor. The treatment of a rental deposit should, however, be determined on the specific facts and circumstances of each case.
Can the taxable amount be reduced?
Yes, the taxable amount (rental income) may be reduced as you may incur expenses during the period that the property was let. Only expenses incurred in the production of that rental income can be claimed. Any capital and/or private expenses won’t be allowed as a deduction.
Which expenses are allowed?
Expenses that may be deducted from taxable income include:
rates and taxes
bond interest
advertisements
agency fees of estate agents
insurance (only homeowners not household contents)
garden services
repairs in respect of the area let and
security and property levies
Which expenses are not allowed?
Maintenance and repairs should be noted as specific costs and should not be confused with improvement costs. The latter is a capital expense that would be included in the base cost of the property, to effectively reduce the capital gain (or loss) on the disposal of the property, for capital gains tax purposes.
When it comes to VAT expense claims, the supply of a “dwelling” is an exempt supply for VAT purposes, and you can’t deduct VAT incurred on its expenses.
What if the expenses exceed the rental income?
Should the expenses exceed the rental income, the loss should be available to be off-set against other income earned by the homeowner, provided that losses are not “ring-fenced” in terms of prevailing anti-avoidance provisions. For more information, see our Guide on ring-fencing of assessed losses arising from trade conducted by individuals.
The homeowner must effectively be able to satisfy SARS that he is carrying on a bona fide trade through the rental of his property.
See practical examples of how to deduct expenses.