Reduce expenses by taking advantage of tax deductions in your commercial property business.
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“While landlords are required to declare the total income acquired through letting out their property, there are certain deductions that can be made, such as a non-capital expense,” says Adrian Goslett is CEO and regional director of RE/MAX Southern Africa. But if you don’t do your taxes properly, you could find yourself in hot water with SARS, and miss out on potential cash savings.
Related: Corporate income tax and small business taxes to know
“Landlords are required to declare the total amount of rental income received as gross income and they will be taxed at the marginal income tax rate, applying to the owner of the home,” says Goslett.
While renting out your commercial property you incur expenses, which you can claim from SARS.
“Deducting the non-capital expenses from the landlord’s tax return will reduce the taxable income and possibly put the landlord in a lower tax bracket, which will be of benefit to them,” explains Goslett. You can reduce your expenses by correctly filling out your tax returns during this tax season.
What qualifies as non-capital expenses?
To receiving the correct deductions from your tax return, you will first need to know what qualifies as non-capital expenses. According to SARS, the following are all considered non-capital expenses:
- Insurance fees (only property owners, not property content), levies, municipal rates, water and electricity.
- Interest paid on the bond if applicable.
- Advertising costs of marketing your property.
- Rental agent’s fees for securing a tenant.
- Cleaning costs, garden services and security.
- If the property is furnished, the depreciation of the furniture’s value can be deducted.
- Legal fees incurred from disputes with tenants. This also includes the eviction of tenants.
- Repairs and maintenance costs. Be aware that this doesn’t include improvements to the property.
For more information visit the SARS website here.
What doesn’t qualify as non-capital expenses?
Your commercial property expenses that are of a capital nature can’t be deducted.
This includes: “Expenses incurred while renovating or adding on to the property. If the tenant has moved out of the property and the landlord decides to make repairs to the commercial real estate to sell it, these expenses cannot be deducted as they did not happen while the tenant occupied the property,” explains Goslett. The expenses need to have been incurred while the tenant was in occupation, and not add to the value of the property.
Related: Tax 101 for small businesses
Declaring a net rental loss
If your total deductions exceed your rental income and you want to declare a net rental loss, the Income Tax Act contains a ring-fencing provision that can help you depending on your circumstances. “If the provision does apply, you won’t be able to offset your rental losses against income received from other sources,” explains Goslett.
According to SARS, this means that you will need to effectively be able to satisfy the revenue collector that you are carrying on a bona fide trade through the rental of your property. For more information please visit the SARS guide here.
- You can deduct non-capital expenses when filing your tax return.
- Expenses that increase the value of your property or occur when you don’t have a tenant aren’t applicable.
- If your total deductions exceed your rental income and you want to declare a net rental loss, the Income Tax Act contains a ring-fencing provision that could help you.