Investment property and tax

Carol Reynolds of Pam Golding Properties (Supplied)
Carol Reynolds of Pam Golding Properties (Supplied)

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

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

Brent Crude
All Share
Top 40
Financial 15
Industrial 25
Resource 10
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Do you think it was a good idea for the government to approach the IMF for a $4.3 billion loan to fight Covid-19?
Please select an option Oops! Something went wrong, please try again later.
Yes. We need the money.
11% - 807 votes
It depends on how the funds are used.
74% - 5362 votes
No. We should have gotten the loan elsewhere.
15% - 1071 votes