Lockdown and rental rebates | Tax return tips for landlords

Owning a rental property portfolio that provides an income is much like owning a business. This means that there are tax implications and dues that need to be paid to the South Africa Revenue Service.

If you earn income from renting out a property, or even subletting a room in your home, you need to pay tax on it. Whether it is your only source of income, or supplementing a salary you receive, this rental income must be declared to SARS.

Rental of residential accommodation includes all of the below:

• AirBnB
• holiday homes
• bed-and-breakfasts
• guesthouses
• sub-renting part of your house e.g. a room or a garden flat
• residential dwellings 

At the onset of the hard lock down in late March 2020, the sad reality of wide spread loss of income was a real worry for both tenants and landlords, says Michelle Dickens, TPN Managing Director - the largest aggregator of tenant rental payment behaviour in South Africa.

Now, a whole tax year later, it’s time to declare rental income, and more importantly the taxable profit or loss on the property.

Dickens says many gracious landlords provided rental relief, meaning no rent was charged for a limited period. "As no rent was charged, no rent was paid, the rental income declared for that period is zero. TPN drafted tenant declaration of loss income which would support an application to the landlord for rental deferments, deposit utilisation and the terms of any repayment of that deferred rent.”

Landlords would still have incurred property expenses for the full tax year though, which "can still be claimed against annual rental income, notwithstanding the fact that certain months no income was billed or received".

“Many tenants and landlords agreed to utilise the deposit in lieu of rent; in this instance the landlord has invoiced the tenant, but offset the payment from the deposit held in savings.  As an invoiced was raised and payment allocated (albeit from the tenant’s deposit already held by the landlord / rental agent), this is treated as taxable income.

Deferment of rent 

“As part of the agreement to use the deposit as rent, the tenant and landlord would have agreed that the tenant would pay back the deposit in monthly instalments, these monthly instalments to repay the deposit are not part of the landlords taxable income as these funds are held on behalf of the tenant and repayable to the tenant at the end of the lease should there be no damages.

Dickens adds that the more complicated scenario is the deferment of rent agreement.

“This agreement concluded that the tenant was still liable for the rent, but due to a loss of income would make future monthly instalments to settle the deferred month(s). The rental income is due in the month of invoice, but the payment is deferred for future periods. Taxable income is based on the rent invoiced. Most importantly landlords will want to ensure a full claim of all property expenses against the rental income to reduce the taxable income.

Examples of non-capital expenses include the following:

• Rates, taxes, security, and property levies
• Interest paid on the home loan (if applicable)
• Advertising costs of marketing the property
• Rental agent’s commission or fees for securing a tenant
• Insurance (only homeowner’s insurance and not insurance for household contents)
• Garden services (if applicable)
• Repairs in respect of the area let (excluding improvements to the property)

Expenses that are regarded to be of a capital nature cannot be deducted. These would include any expenses incurred while renovating or adding on to the property.

“If the tenant has moved out of the property and you decide to make repairs to the home to sell it, these expenses cannot be deducted as they did not happen while the tenant occupied the property,” explains Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett.

According to SARS, these can include, for example, costs for improvements made to the property: “Improvements should not be confused with repairs and maintenance which are allowed as a deduction.  Repairs and maintenance would usually take place when a person attempts to restore an asset to its original condition as a result of damage or deterioration. Improvements would usually result in the creation of a better asset. To determine whether a repair, maintenance or improvement has taken place, the specific facts and circumstances of each case must be examined.”

SARS shares this practical example of how to deduct permissible expenses: 

"Permissible expenses must be apportioned where less than 100% of the property is rented out. The area which is let must be divided by the total area of the dwelling which includes garages and outbuildings.

"Z lets two rooms within Z's main home on a bed-and-breakfast basis. Each bedroom has its own en-suite bathroom.  The total area of the house (including garages and outbuildings) is 420 square metres, while the area which is let, is 120 square metres. The area let expressed as a percentage of the total area of the house, is 28.57% (120/420 x 100). Z's total rental income for the 2019 year of assessment was R50 000:

Notes:

1. Expenses for advertisements are incurred 100% in the production of rental income, and are thus allowed in full. There is no need to apportion this expense.
2. Improvements to the garage are capital/private expenses and are not incurred in production of rental income.  In other words, these are not permissible expenses, and will thus not be allowed as a deduction at all.
3. Expenses for repairs to water damaged carpets are incurred in the production of rental income and are thus allowed as a deduction. Since the expense is only for repairs in relation to the area let, there is no need to apportion these expenses.
4. The total expenses to be set off against rental income amounts to R38 027. The difference between the rental income and the expenses is essentially the rental profit – in this case, R11 973 (R50 000 less R38 027).
5. The source code to be used on the income tax return for a rental profit is 4210 and is 4211 for a rental loss.
6. The rental profit or loss will be split 50:50 when married in community of property. Note that the full amount after expenses must be reflected on the income tax return, as SARS will programmatically apportion the rental profit or loss 50:50.

READ: When does Capital Gains Tax apply to a property sale?

If the total of the deductions exceeds the rental income received and you wish to declare a net rental loss, the Income Tax Act contains a ring-fencing provision that may come into play depending on the circumstances. If the provision does apply, you will not be able to offset your rental losses against income received from other sources.

The percentage of tax paid is according to the landlord’s personal income tax bracket.

“Be warned that evading paying tax on rental income will get you into deep financial water. Rental agents are obligated to provide SARS with a record of the rental income received and paid over to landlords. As a result, it is very easy for SARS to find any discrepancies in the landlord’s tax return. If found guilty of evading tax after notification of an audit, you could be facing a hefty penalty or worse – imprisonment,” says Goslett.

"TPN RentBook is a free to use property management system, with tax reporting functionality for landlords to manage their tax affairs smartly and painlessly," says Dickens.

Goslett adds, “As a landlord, figuring out tax deductibles can sometimes be a rather difficult task. If there is ever any area of doubt, it is best to consult with a professional financial adviser or tax consultant who can provide assistance and guidance through the process."