Tax Implications on the Leasing of Property

The tax implications for the leasing of property can be complex. For your information, we set out the basic TAX implications for the leasing of property.

For the landlord:

• All income received from the rental of a property is of a revenue nature and has to be declared as part of a landlord’s gross income.
• Deductions are available, such as: interest on bond repayments, repairs and maintenance, municipal rates and taxes, letting agent’s fees (if applicable), and expenses not recovered from the tenant, such as security, utilities or garden services. In the case of a sectional title scheme, the levy is also deductible.
• In order for the deductions to be allowed the expenditure must have been actually incurred in the production of income and not be of a capital nature. The landlord must effectively be able to satisfy SARS that he is carrying on a bona fide trade through the rental of his property.
• The cost of improvements, reconstructions or additions to the property cannot be deducted, as these expenses are of a capital nature. Improvements made to leasehold property in terms of a lease agreement by the tenant must be included in the income of the landlord. Either the stipulated amount or a fair and reasonable value will be included. There may be relief available for the landlord, in terms of Section 11(h) of the Income Tax Act.

For the tenant:

• The tenant can claim the rental expense as a deduction for tax purposes if the rental payment or expenditure was actually incurred in the production of income.
• If improvements are made to leasehold property in terms of a lease agreement by the tenant, these must be included in the income of the landlord. Either the stipulated amount or a fair and reasonable value will be included.
• The tenant may deduct such expenditure over the period of the lease. The landlord may be entitled to discount the value of the improvements over the period of the lease or 25 years, whichever is shorter.

Should you have any queries regarding the above do not hesitate to contact us for professional tax advice in this regard.

FAQs

What rental income is taxable in South Africa?
All income received from property rentals must be declared as part of gross income.

What tax deductions can landlords claim on rental properties?
Landlords may deduct bond interest, maintenance, rates, agent fees, and unrecovered tenant costs.

Are property improvements tax-deductible in South Africa?
No, improvements are capital in nature and cannot be deducted from rental income.

Can tenants claim rental payments as a tax deduction in South Africa?
Yes, if the rent was incurred in the production of income, tenants may deduct the expense.

How are leasehold improvements taxed in South Africa?
Improvements made by tenants may be taxed as income to the landlord, based on lease agreement terms.

What qualifies as a bona fide rental trade for tax purposes?
A landlord must show that rental activity is genuine and income-producing to claim deductions.

How is Section 11(h) of the Income Tax Act applied to rental property?
This section provides relief for landlords receiving improvements on leasehold property.

Are levies on sectional title units tax-deductible?
Yes, levies are deductible if the property generates rental income.