Property - Tax Benefits?

bchip

bchip

Expert Member
Joined
Mar 12, 2013
Messages
1,326
Reaction score
429
Hi Guys

Ive heard this argument just too many times now so Ive opened this one for anyone to read.
Everyone keeps saying its a brilliant idea to have a home loan rather than paying off the property
with cash because you get the tax benefits that you get to deduct.

So I thought I would put this to the test where we do 2 scenarios, one with a home loan
and the other without and compare the results.
The scenario specifically deals with the situation where you can choose with or without a home loan,
the discussion is void if you dont have a choice, however the resulting principles are still a good idea.

You dont need to register to read this one.

http://www.myshares.co.za/basic/blogs_view.php?p=11
 
You are failing to factor in the earning potential of the cash in scenario 1.
At a minimum you should allow for income earned through for example a fixed term loan for a equal amount - R1M + income tax thereon.
 
Firstly, you can only deduct expenses incurred on a property to the extent that those expenses were incurred in the production of income from that property. So for example if you're renting out the property.

Secondly, it doesn't make sense to purposely incur a deductible expense (e.g. the interest you pay on a home loan) just so you can then claim back the tax allowance, especially if you have the choice of paying cash.
 
Potential tax claims - if true, which I seriously doubt - vs. paying 3-4-5 times whatever the house is worth over 20-30 yesrs because of all the additional interest.

Yeah, I'd go with the immediate payment option, thanks.
 
By the way, why the hell do we pay so much property tax? R340 per month for me and I literally get **** all in return for that, I must just pay it.
 
Ho3n3r said:
By the way, why the hell do we pay so much property tax? R340 per month for me and I literally get **** all in return for that, I must just pay it.
Click to expand...

Geez, do you live in a shack? My rates are about R1400 a month.
 
deweyzeph said:
Geez, do you live in a shack? My rates are about R1400 a month.
Click to expand...

I'm guessing you're living in a free-standing house, not in a complex.

Shame man, you're getting shafted even more. What does "rates" imply? Just property tax, or does it include electricity and water charges?
 
Ho3n3r said:
I'm guessing you're living in a free-standing house, not in a complex.

Shame man, you're getting shafted even more. What does "rates" imply? Just property tax, or does it include electricity and water charges?
Click to expand...

Well, I do live in Cape Town, so things actually work here, so I'm not feeling that hard done by. That figure includes property tax and water, but excludes electricity which is prepaid.
 
deweyzeph said:
Well, I do live in Cape Town, so things actually work here, so I'm not feeling that hard done by. That figure includes property tax and water, but excludes electricity which is prepaid.
Click to expand...

Oh. Mine excludes water. That's included in our levies, which is about 1.7k a month.
 
Ho3n3r said:
Oh. Mine excludes water. That's included in our levies, which is about 1.7k a month.
Click to expand...

Geez, those levies are a lot. So it seems that living in a free standing house is actually cheaper overall, if you include levies which obviously you don't have to pay for a free standing house, unless you live in an estate.
 
deweyzeph said:
Geez, those levies are a lot. So it seems that living in a free standing house is actually cheaper overall, if you include levies which obviously you don't have to pay for a free standing house, unless you live in an estate.
Click to expand...

It is a lot, and that excludes electricity. I'm thinking of selling the place and getting into a place that actually works since the body corporate doesn't seem to want to apply any rules either unless it affects them financially. But those penalties. :/

My gran pays less and she lives around the corner, for a much bigger place and many more benefits.
 
V8d8man said:
You are failing to factor in the earning potential of the cash in scenario 1.
At a minimum you should allow for income earned through for example a fixed term loan for a equal amount - R1M + income tax thereon.
Click to expand...

There are pros and cons to a further "what if" analysis. Your assuming that you wouldve put the money into a good investment, what if you took the extra cash and put it into Abil, or even risk-free abil prefs?

The more choices you include the more it will skew the picture, Im trying to compare as closely as possible apples with apples and the more factors go into the model the more uncertain the outcome.
Thats why I would prefer to take things step by step.

Doing a quick back-of-that-matchbox calc I guess you would need a 5% (after tax) no risk investment minimum to break even.
So it is possible, just very complicated as the margins are very tight on things to go wrong as if there are any costs in those deals (eg brokerage, other taxes, etc) you would lose money, and thats if you find a 5% no risk investment.
 
Property can be geared, which makes your R1Mil more powerful

If you hell bent on spending the R1 Mil on property, in theory you could purchase 4-5 properties, using the R1Mil for deposits and transaction fees

Your returns would then be 4-5 fold.

Then the issue of tax - yes there some

I own 7 properties, and the tax benefits add significantly to my bottom line. Since 3 of my properties are still in my name and I pay 41% personal tax, I make sure that my expenses are at it's max to either not pay any further income tax on the property income or better yet, get a tax refund should the properties make a loss

So, interest is a tax write off, so big chunk of my rental income is automatically not subject to income tax due to this ie Rental is R7200, interest on loan payment is R4500 . Its in my interest to keep the interest portion of my bond payment at its highest. Then my other expenses gets added to the bill. Management fee , rates and taxes, maintenance, accountant etc. In the end, I usually get a tax refund from SARS for properties in my personal name since I ensure my 'expenses' is always higher than my income.

My other properties are in a trust and I've never paid any income tax on them as technically, it's in deep debt having to repay the interest free loans I made to the trust. Even when these loans are paid off, there are still many ways to reduce the tax liability on trusts, hence SARS keen interest in them of late

Bottom line - he who pays for an investment property with cash is not making his money work for him. And why you would want to pay off a bond in 5yrs is also beyond me. Its a tax write off , use it. In fact, if I could get an interest only loans on all my investment properties in my name, I'll do so in a heart beat. But financial discipline is required as any spare cash now generated must be put into either debt not making any money for you (like my primary home) or invested somewhere else. Debt making money for you should not be frowned upon to easily

I'm not too sure about the market at present, so I'm pumping all spare cash into my primary home until I decide which way forward but I'm def not pumping any extra cash into my investment properties as this will reduce my interest incurred

on a side note - while rental income has been great , it's the capital growth on the properties that has been the real winner. 6 of the properties are in Cape Town
 
Last edited:
mountainboy said:
Its in my interest to keep the interest portion of my bond payment at its highest. Then my other expenses gets added to the bill. Management fee , rates and taxes, maintenance, accountant etc. In the end, I usually get a tax refund from SARS for properties in my personal name since I ensure my 'expenses' is always higher than my income.
Click to expand...

You really didnt read the article did you? :confused:


mountainboy said:
Property can be geared, which makes your R1Mil more powerful
If you hell bent on spending the R1 Mil on property, in theory you could purchase 4-5 properties, using the R1Mil for deposits and transaction fees
Click to expand...

Yes this is true and worked out incredibly well for everyone in 2008.
Good luck with that.
 
Ho3n3r said:
By the way, why the hell do we pay so much property tax? R340 per month for me and I literally get **** all in return for that, I must just pay it.
Click to expand...

Not to mention the tax you paid when you bought the place.
 
You must log in or register to reply here.
Back
Top
Sign up to the MyBroadband newsletter
X