Dealing with the taxman: Should I invest in a third property – will I pay more tax?
Question: I already own a townhouse, which I rent out. Our primary property has a one bedroom flatlet that we also rent out. I am considering purchasing a third property to rent out.
Is it worth doing this or would this push me into a higher tax bracket? Please advise on how the capital gains tax works as well when selling the properties.
Jaco answers: Considering the question, I do believe that this will increase your tax bracket. However, you have not stated what your current tax bracket is. My advice would be that you first determine what your taxable income will be.
1. What does CGT mean for a homeowner?
It means that taxpayers, including individuals, trusts, companies and close corporations, will be taxed on the profit they make when they sell an asset or property of a capital nature. Often, it will not affect one's primary residence, provided the property is smaller than two hectares and the profit to be made is less than R1 million.
However, homeowners will be liable for CGT on second properties or holiday homes that are not their primary residence.
2. How is a capital gain/loss calculated?
It’s the difference between the ‘base cost’ of the asset and the amount for which it is sold.
3. How is ‘base cost’ determined?
The base cost is the expenditure made to own the asset; and includes the cost of any improvements and any other costs directly brought about by the acquisition or sale of the asset. It is the actual capital cost, plus the cost of getting the asset, agent's commission, legal fees, conveyance fees and the cost of improving the asset. This base cost does not, however, include any expenditure that may be claimed as an income tax deduction or any borrowing costs (interest on loans) or repairs.
The taxpayer must be able to prove the base cost if no record exists – therefore keep all your records.
4. What is included in Capital Gains Tax?
Primary residences owned in the name of a company, close corporation or trust, individual holiday homes or second homes and properties let to tenants as well as boats, aircraft, caravans, shares, unit trusts and private investments, second-hand policies, Kruger Rands or other silver or gold minted coins.
5. What percentage of CGT is payable?
For natural persons, the amount is 25%. This portion of the net gain will in turn be taxed at the taxpayer's marginal tax rate. As an effective tax rate, this means that individual taxpayers will pay a maximum of 10.5% and corporate taxpayers, a maximum of 15%.
For more information, please call 041 367 1151 • www.jacorademeyer.co.za
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