This week a reader asks our panel of experts to clarify the issue of income tax as it relates to rental income.
The reader and her spouse are joint owners of a property, which they rent out. She is no longer employed and this rental currently represents her only income.
The rental money is also used to pay the membership fees for their medical aid scheme, of which the reader is its principal member.
She would like to know whether she would be able to reflect the rental income and expenses incurred on her tax return.
The answer to this is quite simple, says Charl Crous from Du Toit Strömbeck Attorneys in Port Elizabeth. “All income earned must be declared to the South African Revenue Services.”
Crous says it may be that the reader qualifies for certain exemptions in terms of interest and dividends earned, as well as deductions such as expenses incurred in the production of the income.
“This would ultimately reduce the taxable income and therefore the potential tax payable, but the initial gross income must be fully reflected.”
The reader has to keep in mind that since they own the property jointly, she needs to reflect 50% of the income and her spouse the other 50%, says Crous. “This therefore means that the expenses incurred in respect of maintenance and so on should also be split.”
According to Crous, capital expenditures do not qualify as expenses, but increase the value of the property and can be taken into account as an improvement in the event that the property is sold. “Expenses would relate to aspects such as repairs to the gutters or the plumbing.”
Because she is the principal member of their medical aid, says Charlotte Vermaak from Chas Everitt in PE, the reader would qualify for the deduction allowed for monthly membership contributions. “These deductions may then be offset against the income she has declared.”
“She may find that the actual tax payable is not substantial at all,” says Vermaak.
“Once her taxable income is calculated, the tax payable in terms of the sliding scale would be further reduced by the primary rebate to which all taxpayers are entitled.”
As mentioned before, her husband would have to add half the rental to his income from other sources, says Vermaak.
“He would still be entitled to the deduction of half the expenses. However, taking into account any other income, his tax burden may be slightly more onerous, especially if he ends up in a higher bracket on the sliding scale.”
If they sold the property, Vermaak says the capital gain would be split between the spouses and included in their taxable income, with each of them entitled to the prescribed annual exclusion.
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