Rental income and income tax

The ability to earn a passive income through property is a wonderful opportunity that can add significantly to your monthly monetary needs. A rental property that is well-positioned, in demand and well maintained is an excellent asset and a sound investment. But in terms of rental income and income tax, how exactly does it work?

Craig Hutchison, CEO of Engel & Völkers Southern Africa explains that if you rent out a property and receive a rental income, it will be subject to tax.

"Rent received from the letting of residential accommodation such as a holiday home, cottage on your property, sub-renting part of your house or a townhouse will all be subject to being taxed. The rental income is added to any other taxable income you receive, such as a monthly salary," explains Hutchison.

Can the taxable income be reduced?

Yes, the taxable income accrued from renting out a property can be reduced as expenses are always incurred.

See more: Tax tips for renting out your property

Expenses that may be deducted from rental income include:

• Bond interest
• Rates and taxes
• Property levies
• Estate agency fees
• Homeowners insurance (excludes household contents insurance)
• Garden services
• Repairs
• Security

Which expenses are not allowed?

It must be noted that only expenses related to the rental of the property may be deducted. Capital and private expenses won't be considered as a deduction by SARS.

"While maintenance and repairs expenses can be passed, improvement costs are a capital expense and will be included in the base cost of the property. When the property is sold, the improvement costs will be an expense that will effectively reduce the capital gain, thus reducing the capital gains tax payable to SARS," explains Hutchison.

If expenses exceed rental income

There are times when, for one reason or another, the expenses accrued from leasing a property exceed the income. The loss should then be off-set against other income received by you the owner. When leasing out a property it is always best to consult with an accountant or tax specialist to fully understand what is deductible, how much tax will essentially be paid over the annual lease period and the like. This will provide a realistic view of your nett income.

"Income tax aside, the leasing of a residential property if managed effectively, is a viable and financially sound way of adding to your monthly income stream. At the same time, you are the owner of an asset that will appreciate in value over time and will pay dividends as the years go by," concludes Hutchison.