Rental properties are a great investment because over time, they can pay for themselves and deliver a profit. However, the South African Revenue Service (SARS) also taxes rental income, which can put a dent in your profit.

We have some tips on how you can maximise your tax benefits by claiming the tax deductions that you’re entitled to as a landlord.

How does SARS calculate tax on rental properties?

To assess your annual tax liability, add the profit you make from rental income to any other income you have. SARS will calculate your rental profit by subtracting any costs you paid to maintain your property from the amount you were paid in rent. If a tenant breaks the conditions of the lease (for example, by not repairing damage that they caused) and as a result you keep their deposit, the deposit will also be included in your taxable income.

If your expenses are more than your rental income, you can use the loss to offset other income, on condition that it’s not in a category restricted by SARS. You’ll also need to prove that you’re genuinely renting out your property for income.

Tax-deductible expenses for rental properties

Navigating the process of reducing your SARS obligations may seem daunting, but you have the right to claim legal tax deductions. The key is to maximise your profits and avoid paying more tax than necessary. For example, if you’re renting out a furnished property, an effective way to cut your tax liability is by depreciating the value of your furniture.

Over time wear and tear naturally occur, and these items will eventually require replacement. SARS allows you to depreciate furniture upfront, enabling you to distribute the expected replacement costs across several years. This approach ensures that you make the most of legitimate deductions while staying within legal boundaries.

Here are some other deductibles that can help lower your tax obligations:

• Solar battery depreciation
  Just like furniture, the components of a solar power system undergo wear and tear over time. SARS understands that batteries, the most expensive part of a solar installation, suffer a decrease in performance and charge capacity over time, so they allow you to claim for depreciation. If you have installed solar power in a property that you rent out, and the batteries cost more than R7,000, you can write off the battery cost as a tax deduction over 5 years. If the batteries cost R7,000 or less, you can write off the full cost in the year that they are brought into use.
  
  
• Advertising costs
  You can deduct the expenses involved in promoting your property to prospective tenants.
  
  
• Garden services
  If you decide to maintain the garden yourself, rather than making it the tenant’s responsibility in the lease, you can deduct those costs too.
  
  
• Home loan interest
  If you have a bond on your property, you can deduct the interest portion of your home loan payments.
  
  
• Insurance
  The tenant is responsible for their own house contents insurance, but the landlord must provide the building insurance – and you can deduct the cost of your premiums.
  
  
• Property levies
  If your property is part of a sectional title development or homeowners’ association, your communal levies are deductible.

• Rates and taxes
  You can also deduct the municipal charges and property taxes on your rental property.
  
  
• Rental agent’s commission
  If you engage a rental agent to find you a tenant or manage your rent collections, you can deduct the commission they charge.
  
  
• Repairs
  The cost of repairs directly related to the rented area, but excluding property improvements, is deductible.
  
  
• Security costs
  Your monthly subscription to a security company for alarm systems and armed response services is also deductible.

Repairs versus renovations

There’s a difference between repairs and home improvements or renovations, and only repairs are tax deductible. Repairs involve restoring something to its original condition, such as refurbishing cupboards, repainting walls, repairing plumbing or electrical wiring, fixing appliances, roof repairs, and replacing broken flooring.

Home improvements enhance or extend the property’s lifespan or income-earning potential. Unlike repairs, these weren’t present when you bought the property. They include significant investments like installing air conditioning, renovating buildings, adding security or an inverter and extending the property. While they don’t qualify as deductible expenses against taxable rental income, they increase the base cost of the property, which will reduce the capital gains tax if you ever sell it.

Similarly, you cannot claim bond and transfer fees as tax-deductible expenses against rental income. However, when selling your property, you can deduct them from the capital profit, further reducing the amount of capital gains tax you’ll pay.

Maximising your tax benefits is a smart way to increase your profits. Claiming legitimate deductions is not the same as illegally dodging taxes, but it’s a good idea to consult a tax professional to prepare your annual tax returns. They’ll know exactly what you can and can’t claim as a deduction and keep you on the right side of the law.