Tax warning for South African homeowners

Sentinel Homes managing director Renier Kriek warned South African homeowners to be mindful of the taxes they will pay at various stages of ownership, as they can add up to a lot more than many may realise.

“Whether you’re buying property for business or to live in, you’re going to pay taxes at various stages of ownership,” he said.

“Owners – especially first-time buyers – need to be aware of their tax obligations and plan their property investments accordingly.”

Kriek broke down all the taxes homeowners can expect to pay as part of their property investments at various stages of ownership.

The first stage – and your first tax burden – kicks in when you buy a property. Kriek said you will either pay VAT or transfer duty at this stage, but never both.

VAT is charged when a VAT-registered business sells a property, typically as a new residential development. Transfer duty is levied when buying an existing residential property from its owner.

“Importantly, transfer duty cannot usually be financed through a home loan, so you’ll have to come up with the money yourself,” he warned. “On higher-priced properties, transfer duty can run into the hundreds of thousands.”

With a new property, Kriek explained that VAT is included in the purchase price, so your loan already covers it.

“For first-time buyers, a new property can be much easier on their pockets,” he said.

“It’s also important, when shopping for property, to keep in mind that new properties are cheaper at the same advertised price than their second-hand competitors due to the impact of the transfer duty.”

The next stage happens once you take ownership of your property, which is when you’ll immediately start paying municipal taxes.

Whereas transfer duty and VAT are paid to SARS, municipal taxes fund city services, infrastructure, and salaries.

“When planning to buy, you should consider how this tax will impact your monthly cash flow,” Kriek said. 

“We have, startlingly, had several clients who were surprised to learn that they will receive a monthly tax bill on their new home.” 

“The municipal tax is in addition to consumption charges for water and electricity and expenses like levies payable to the body corporate or homeowners’ association.”

The next round of taxes kicks in when you sell your property, which means you will pay capital gains tax (CGT). “This is where things get a bit complicated,” Kriek warned.

CGT is calculated as the difference between the price you paid for a property and the price you’re selling it for.

When it comes time to declare their annual income to SARS, individuals are taxed on 40% of this profit at their marginal tax rate.

Some relief is available if this is your primary residence, in which case the first R2 million of your profit is tax-free.

Kriek warned that there are a few catches, though. For example, if you initially rented out the property but then moved in to live there permanently before selling it. 

In that case, the R2 million allowance must be divided proportionately between the period you rented it out and the period you lived there. In addition, you will not be able to claim that first portion as tax free.

Another example that complicates matters is when you claim a deduction for a part of the property used for business, such as a home office. Kriek explained you will also have to subtract this part from the allowance.

Trusts and companies, on the other hand, pay tax on 80% of their capital gains and do not benefit from a primary residence allowance. 

“This seems, on the face, to provide valuable incentives not to own your primary residence through an entity,” Kriek said. 

“However, the estate duty implication and the effect on the cost of administering your estate should also play into the consideration of the correct structure.”

Secondary properties, such as a holiday home, also do not benefit, even if you do reside there occasionally.

The next round of taxes kicks in when your estate is executed. At this stage, you will have to pay estate duty on the value of your estate above R3.5 million, rendered unto SARS by your estate administrator.

“Any property disposed of at this time will attract CGT and the same exclusion allowance is applied to your primary residence,” Kriek explained.

“If your estate cannot cover your debt or tax obligations, your property may be sold to raise the necessary cash.”

He said there are several methods to protect your property against such a loss. 

For example, you could take out extra life insurance to cover the tax liability. Or, you could sell your property to an estate planning vehicle, such as a trust or a company, at the earliest opportunity to cap your eventual tax liability.

“Although you’ll pay CGT on the profit from that sale, any future property value increases will be on the balance sheet of the entity, not your own, thereby escaping an otherwise increasing estate tax liability,” Kriek said.

“And since trusts and companies don’t die, you can avoid CGT in perpetuity when you do – to the advantage of your beneficiaries, of course.”

Another often overlooked stage of taxes and property ownership is when you earn income from your property.

If you earn income from any source other than employment, you must pay provisional tax. This includes income from renting out your property.

Provisional tax requires that you estimate your non-employment earnings for the year and pay tax on half of those earnings at the end of August, with the balance due at the end of February in that tax year. 

When you declare your total annual income, any provisional tax paid during the year is deducted from your assessed tax.

“Just estimating what you’ll earn in the coming year can be stressful and calls for the services of a professional tax advisor or accountant,” Kriek said.