Tax implications of investing in your personal name
When you go out and find a property that you like, what investment vehicle should you put it into?
Aliyah is just starting out on her property investing journey. She does some research and finds the perfect 2 bed, one bath house that has been standing empty for 6 months in a popular suburb. It needs some serious love, but given its incredible location right next to a popular primary school and around the corner from a fabulous mall, the potential for great returns is off the charts!
She signs on the dotted line and embarks on a major refurb, clearly Aliyah doesn’t scare easily. The kitchen and bathroom are ripped out and redone, carpets are replaced and the entire house gets a new lick of paint. 6 months later, the neighbors hardly recognise the sparkling new gem on their street and the property is ready to be sold. Aliyah puts it on the market, sells it and makes herself a tidy R100,000 profit. WHOOHOO!
Aliyah calls up her tax consultant, Hilary, who tells her that SARS will give her a R40,000 capital gains tax(CGT) exemption on the first property she sells in her personal name per calendar year. The balance of her profit, R60,000, will be taxed at 18%.
Aliyah is eager to grow her wealth so rushes out and finds another property. This time, a 3 bedroom house, two bathroom unit is a secure complex sporting a communal braai area and swimming pool. She fixes it up, sells it and makes herself a tidy little profit. Her friends come round to view the end result which turns into an impromptu celebration party . The champagne flows freely as do the endless platters of smoked salmon sushi rolls. We can confirm the evening was a massive success!
The next morning, Aliyah calls Hilary to share the good news with her. “Hilary” she gasps, “you won’t believe it, I have made another R100,000 on the sale of my last property! What happens with the CGT now?”
Hilary sighs deeply. “Well Aliyah, I do wish you had shared your plans with me. I thought this property game of yours was a passing phase. SARS gave you R40,000 CGT exemption on the first property you sold in a calendar year in your name, but now you have gone and done it again.”
Aliyah can’t resist chiming in to sing a few lines of “Oops I did it again”. Hilary is not amused. “SARS is going to tax you at your normal tax bracket on the full profit, no tax breaks for you this time. And since you are in the top tax bracket, SARS will be taking 45% of your profits.”
Aliyah suddenly feels like she might throw up. Was it one too many sushi rolls? Nope, it was the realization that if she had taken the time to get solid tax advice BEFORE buying the property, she could have saved herself a pretty penny. Now she has no choice but to hand over almost HALF her profit to the tax man. Ouch.
Determined not to make the mistake again, and slightly annoyed with snippy judgy Hilary for underestimating her drive and determination, she schedules an appointment with Precious, a well known property tax adviser.
Precious gives her sage advice. “Remember Aliyah, property investing is a game of finance with some houses thrown in the middle. This means your financial setup can make or break your ability to add properties to your portfolio and grow your wealth. Getting the structures right at the outset is absolutely crucial to your success.”
Precious goes over the rules of investing in your personal name again:
You can sell one property per calendar year in your personal name and qualify for a R40,000 CGT exemption.
You will be taxed 18% on the balance of your profit.
If you sell more than one property in a calendar year, you will be taxed at whatever your personal tax rate is because the tax man thinks you are trading in property.
Surely there must be alternative investment vehicles Aliyah asks?
Next week we’ll consider investing in a business...is that a better option? Don’t miss it!