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What is rental income?
If an individual rents out a property (generally residential accommodation) and receives rental income, the amount received will be subject to income tax.
Residential accommodation can include:
- holiday homes
- bed-and-breakfast establishments
- guesthouses
- renting a section of your home, e.g. a room or a garden flat. Read Interpretation Note 28 on rules that may apply if a part of your private home is used for purposes of trade.
- dwelling houses and
- other similar residential dwellings.
How is tax calculated on rental income?
The rental income you receive should be added to any other income you may have, but will also be reduced by certain permissible expenses incurred. (see below)
If any other amounts are paid to you for the rental of residential accommodation, in addition to the monthly rental, these amounts will also be subject to income tax. The additional amounts can include, for example, lease premiums which are usually paid in the form of a lump sum at the start of the lease, in which case the full amount is subject to tax in the year of assessment during which it accrues or is received, whichever is the earlier.
The receipt or accrual of a rental deposit by a lessor need not be included in the lessor’s gross income at the stage it is initially paid, if there is an obligation on the lessor to refund the deposit at a later stage. It will generally only become gross income in the lessor’s hands when the deposit is eventually applied by the lessor. The treatment of a rental deposit should, however, be determined on the specific facts and circumstances of each case.
Can the rental income be reduced?
Yes, the rental income may be reduced by any permissible expenses incurred during the period that the property was let. Only expenses incurred in the production of that rental income can be claimed. Any capital and/or private expenses will not be allowed as a deduction.
Which expenses are permissible?
Permissible expenses that may be deducted from rental income could include:
- rates and taxes
- bond interest
- advertisements
- agency fees of estate agents
- insurance (only homeowner’s insurance and not insurance for household contents or bond insurance)
- garden services
- repairs in respect of the area let and
- security and property levies
Which expenses are not allowed?
Expenses that are capital in nature or that are not in the production of rental income will not be allowed. 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.
While improvements are not allowed as a deduction against rental income, the value thereof can, however, be included in the base cost of the property, to effectively reduce the capital gain (or loss) on the eventual disposal of the property, for capital gains tax purposes.
The supply of accommodation in a dwelling is an exempt supply for VAT purposes, and consequently you may not deduct any VAT incurred on expenses in respect of supplying accommodation in a dwelling.
What if the expenses exceed the rental income?
Should the expenses exceed the rental income, the loss should be available for set-off against other income earned by the individual, provided that the loss is not “ring-fenced” in terms of prevailing anti-avoidance provisions. For more information, see our Guide on ring-fencing of assessed losses arising from trade conducted by individuals.
The individual must effectively be able to satisfy SARS that he or she is carrying on a bona fide trade through the rental of his or her property.
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.
Let’s look at the following example:
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 dwelling 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 dwelling, is 28.57% (120/420 x 100). Z’s total rental income for the 2021 year of assessment was R50 000:
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Notes:
- 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.
- Improvements to the garage are capital/private expenses. In other words, these are not permissible expenses, and will thus not be allowed as a deduction at all.
- 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.
- The total expenses to be set off against rental income amounts to R38 027. The difference between the rental income and the expenses is taxable income – in this case, R11 973 (R50 000 less R38 027).
- The source code to be used on the income tax return for a rental profit is 4210 and is 4211 for a rental loss.
- The rental profit or loss will be split 50:50 when married in community of property and the property falls into the joint estate. Note that the full amount after expenses must be reflected on the income tax return, as SARS will pro grammatically apportion. the rental profit or loss 50:50.
- Since the expense is only for repairs in relation to the area let, there is no need to apportion these expenses.
