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Invest in new development buy-to-let property and get a tax write-off

21 Nov 2019

It’s not often that tax is associated with anything pleasant, however, a section of the Income Tax Act – Section 13sex – offers massive tax advantages for property investors, with clued up investors being able to claim millions of rands back from SARS.

“If the investor buys with a long-term view, the deduction will provide extremely attractive relief in the form of lower tax obligations for the periods that the properties are owned," says Stefanutto.

Coupled with this, innovative new property developments and the current economic climate have also provided great opportunities for property investors to grow their portfolio and take advantage of SARS’ tax write-offs.

Rob Stefanutto, who heads up developments for Dogon Group Properties, explains that property buyers can leverage Section 13sex of the Income Tax Act in their favour, to get tax returns from their buy-to-let property portfolios. “There are many ways to minimise tax within your property portfolio, but no tax incentive comes close to the impact Section 13sex of the income tax act can have.”

“The tax write-offs obtainable through Section 13sex come into effect when property investors buy a minimum of five residential units for rental. Purchasers are then able to off-set their investment by depreciating the cost of the units at an accelerated rate of 5% a year over 20 years.”

If an investor purchases five new residential units at R1 million each, SARS will allow that investor a R2.75 million tax deduction to reduce their tax liability

Stefanutto offers an example of how effective the 13sex tax allowance is: “If an investor purchases five new residential units at R1 million each, SARS will allow that investor a R2.75 million tax deduction to reduce their tax liability. This equates to an annual tax allowance (for 20 years) of R137 500, taxed at 45% equals R61 875 a year (or effectively R5 156 a month).”

There are several key requirements to qualify for the 13sex tax incentive:

  • The units must be new. No existing or second-hand properties will qualify for the tax incentive.
  • The taxpayer may not live in the property as their primary residence.
  • In addition, the investor must use these units in his trade, which more than likely would be the rental of the property. (This means it’s ideal for buy-to-let investors)
  • The taxpayer must own at least five residential units.
  • The units must be in South Africa.

However, Stefanutto does caution that investors who are purchasing the properties with a view to making a quick profit should not claim this deduction because when a unit is sold, the deductions claimed under this section (from the purchase date to the date of sale) must be recouped and added to the taxable income of the investor in that year.

“If the investor buys with a long-term view, the deduction will provide extremely attractive relief in the form of lower tax obligations for the periods that the properties are owned.

New developments offer investors opportunity to take advantage of 13sex

According to Dogon Group Properties, there is currently a range of extremely well-priced apartments available in exciting new residential developments that allow investors to take advantage of the 13sex incentive. “These apartments are priced at a level that makes it possible for property investors to look at potentially buying more than one, adding to one’s portfolio to reach the required number of five to claim the sex13 deduction.”

“One of these is a pioneering micro-living development in Woodstock, Cape Town, called 1 Albert Road that is currently under construction,” explains Stefanutto. “Apartments here start at R985 200 (VAT Inclusive) – with no transfer duty. The building promises to be highly desirable for tenants with communal recreational spaces, shops, a food court, laundromat, heated swimming pool, security, fibre connectivity – and situated on main transport routes for quick access to the CBD.”

Foreshore Place, also currently under construction, is another such development, with prices starting from R1 164 million. Foreshore Place, situated on the corner of Adderley Street, Riebeek Street and St Georges Mall will feature 15 floors of commercial space with the ground floor offering banking facilities, coffee shops, food and other shops. Above this will rise 11 floors of residential units. The fourth floor of Foreshore Place will feature a business and resident’s lounge and entertainment terrace.”

“Another almost completed luxury urban development in Cape Town’s suburb of Zonnebloem is offering investors a wonderful opportunity to own property in the inner city of one of the world’s most popular cities – with no transfer duties payable as well as Urban Development Zone tax incentives from only R1.495 million.

Discounted property at new developments

Stefanutto says that in addition to these affordable examples, because of the current tough economic climate, many developers are currently offering great discounts on remaining stock at new residential developments – so the time is now to grab the opportunity. “These more affordable product offerings allow an investor to take maximum advantage of the tax write-off opportunities offered by SARS through Section 13sex.”

“It is advisable that investors who are keen to take advantage of 13sex consult with their tax specialists before proceeding to ensure that they qualify to claim the incentive.”

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