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A Fin24 user wants to know what the most tax efficient way would be to buy investment property. She writes:
I am wanting to buy an apartment for investment purposes and want to know the most tax efficient way to do so.
READ: Ever increasing demand for rental properties
Carol Reynolds, Pam Golding Properties area principal in Durban, Durban North and La Lucia, responds:
From a tax perspective, it is ideal to invest in the market under R1m. This is because your transfer duty at this end of the market is substantially lower, and as the purchase price increases, so too do the costs.
It also means that when an investor chooses to sell his apartment, the capital gains tax shouldn't be exorbitant because of the price band.
When investing, the type of vehicle used to purchase the property impacts upon the tax.
Residential properties are exempt from capital gains tax (CGT) for the first R2m gain, provided that these are primary residences.
READ: Capital gains tax on a rental property
Once you enter the investment market, this exemption falls away and the decision is simply whether to purchase in a company, trust or individual name.
Acquisition costs are the same for all legal entities, but CGT is highest on trusts, followed by companies and then private individuals. For private individuals, the effective rate is about 13% of the gain, for companies, it is about 18% of the gain and for trusts it is about 26% of the gain.
With regard to the actual management of the investment and its rental returns and tax implications, the ideal scenario is to gear the property in such a way that the rent almost covers the bond instalments, but there is still a small monthly "tax loss".
Therefore, one should aim to put down a 50% deposit and acquire a 50% bond, as returns are generally equivalent to 0.5% of the purchase price. Therefore, on a R1m apartment, you can expect a rental of R5 000.
Your bond repayments will be around R5 000 per month and then your levies and rates will add to the monthly costs, leaving your property running at a small tax loss.
ALSO READ: Ten things to do before selling your home
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