Holiday rental income – what are your tax obligations?

– Sipho Matiwane (Head of Cornerstone Tax and Accounting)

For holiday home owners, December means one of two things: a fun-filled getaway to recharge for the year ahead, or the opportunity to earn a substantial second income from holiday rentals. If you fall into the latter category, it’s vital that you know the tax obligations attached to a second income, as it works slightly different from a ‘normal’ single income tax situation.

What is considered rental income?

If you own a property and receive rental income from it, that is considered a rental and second income and will be subject to being taxed. Rental of residential accommodation includes:

  • Holiday homes
  • Bed-and-breakfast establishments
  • Guesthouses
  • Sub-renting part of your house for example a room or a garden flat
  • Dwelling houses and
  • Other similar residential dwellings

How is tax calculated on rental income?

The rental income you get should be added to any other taxable income you may have. Any amount paid to you in addition to the monthly rental is also subject to income tax – like a salary or interest on an investment.

Regardless of when a lease starts and ends, the full amount that you receive form letting a property is subject to tax in the year that it accrues or is received. If you received a deposit (usually at the start of the lease) it does not have to be included in your gross income at the stage of receipt if there is an unconditional obligation on the lessor to refund the deposit at a later stage.

It will only become gross income when the deposit is applied by the lessor. The treatment of a rental deposit should, however, be determined on the specific facts and circumstances of each case.

Is there any way to reduce the amount of tax I must pay and what can I deduct?

Just like your personal taxes, there are several expenses that can be deducted from your taxable income. These expenses must be incurred in the production of the rental income, in other words the expenses must have been directly incurred to help you to receive the rental income and must be reasonable. For example, you can claim advertising costs back because it helped you to advertise and let out the property, but you cannot claim the cost of new home entertainment system and argue that it makes the property more appealing and aided in the generation of rental income.

Expenses that may be deducted from taxable rental income includes:

  • Rates and taxes
  • Bond interest
  • Advertisements
  • Agency fees of estate agents
  • Insurance (only homeowners not household contents)
  • Garden services
  • Repairs in respect of the area let and
  • Security and property levies

Whether it’s personal tax, business tax or tax on holiday rentals, it’s always best to have a qualified and specialised tax specialist in your side to ensure that you stay SARS compliant and to maximise your tax returns each year. Contact Cornerstone Tax and Accounting Services today for expert advice and bespoke tax and accounting services.

Remember to follow us on Facebook and LinkedIn for more useful and interesting content or subscribe to our newsletter by clicking here.

This article was adapted from Tax on rental income published by SARS:

, , , ,