Canny real estate investors legally leverage the Income Tax Act in their favour, to get SARS to pay them millions of rand back from their capital invested into their buy-to-let property portfolios.
This is according to Jacques Fouché, CEO of property group IGrow, who said that South Africans could stand to earn millions by making a SARS an active role-player in their property investments, rather than a hostile force.
“SARS is actually on the side of the buy-to-let investors – it genuinely wants investors to pay less in taxes.
“The massive tax advantage that you get from SARS is called Section 13Sex of the Income Tax Act. By putting your time, and investors strategy into activities that produce jobs, housing, and grow the economy, you get tax benefits,” he said.
“SARS is effectively making a deal – if you are going to help us by providing affordable housing in South Africa which in turn helps us grow the economy, then we will make it worth your while by giving you money back – a lot of money.”
According to Fouché, there are four key requirements to qualify for the SARS sec 13sex tax incentive:
- The unit must be new or unused (including a self-contained apartment) and mainly used for residential purposes. So no existing or second-hand properties will qualify for the tax incentive.
- The unit must be used solely for the trade of the taxpayer – in other words, the taxpayer may not live in the property as their primary residence. This means it’s ideal for buy-to-let investors to rent it out to tenants.
- The taxpayer must own at least five residential units, all of which must be used for the taxpayer’s trade. (Please note, you don’t need to buy all five simultaneously.)
- The units must be in South Africa.
A practical example
“For every five properties investors buy, SARS allows a minimum of 55% of the purchase price as a tax deduction,” said Fouché
So, if you were to buy five properties, for a million rand each:
- 5 x R1 million properties = R5m x 55% = R2.75 million that SARS will allow you as tax deduction to reduce your tax liability.
- This equates to an annual tax allowance for 20 years of R137,500, taxed at the 45% income marginal tax rate equals R61,875 a year (or effectively R5,156 a month) that SARS will help you to gain every year for 20 years.
“As a smart investor, using this incentive you can build your property portfolio effectively tax-free until retirement,” said Fouché
“Applying what I call the ‘stackable tax effect’ by using the allowable deductions, concessions, rebates and incentives in a strategic way to reduce your tax you will create a compounding tax effect in your portfolio and build substantial wealth at the same time.”
“SARS is there to make you rich in real estate, especially if you follow the rules of the rich.”
Read: What tax benefits do homeowners get in SA?