A reader has asked the Property Poser expert about the tax implications of rental income for him and his wife, who are both pensioners.
The reader explains that they are considering renting out their current property, which his wife owns, and then renting another property elsewhere.
As owner and landlord, the reader’s wife will be liable to declare all rental income earned on the property, along with any other income she may receive, says Sean Radue of Radue Attorneys in Port Elizabeth.
“It’s quite possible though that she may deduct certain expenses incurred in the production of this rental income.”
Radue says these expenses may include advertising costs, rates and taxes, garden services and the interest portion of a bond instalment.
“She will not however be able to deduct expenses of a capital nature, which would include items such as refurbishing a bathroom or replacing the roof.”
The rental income, together with any other income she may have earned for the tax year, less eligible exemptions and deductions, is then taxed on a sliding scale, he says.
“Certain rebates are applicable which may further reduce her taxable income.”
Radue says for the current tax year a primary rebate of R12 726 is applicable, together with a further rebate of R7 110 for taxpayers over the age of 65.
“And then for tax payers over the age of 75 an additional rebate of R2 367 is applicable.”
A taxpayer aged 76, for example, will qualify for relief in excess of R22 000 when all these rebates are taken into account, he says.
“Our reader doesn’t tell us his wife’s age so we are not sure what will apply in her case.”
The reader also does not mention how long or why they are looking to rent their property out and live elsewhere, says Radue.
“These factors may influence the nature of the property as their primary residence.”
He says this could become important in the event that the property is disposed of some time in the future, for example, in the event of his wife’s death.
“Should the property lose its primary residence status, it may negatively affect the potential Capital Gains Tax payable on disposal.”
Introduced in 2001, Capital Gains Tax roughly entails that any growth in capital since this date is taxed upon the disposal of a capital asset, such as a fixed property, says Radue.
“There are many exclusions that may be applicable, such as the primary residence status of the house you live in permanently, which may alleviate some of the tax implications.”
He says once the correct capital gain is calculated in a specific tax year, a portion thereof is included in the owner’s taxable income for the year and the normal tax tables are applied to determine his or her ultimate tax liability.
“It may be worthwhile for our reader to consult a tax practitioner on some or all of these aspects before making a final decision on whether or not to continue with the rental of the property.”
The possible tax implications of the rental income are not the only factors to consider, says Radue.
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