Section 13sex of the South African Income Tax Act is one of the more useful tax incentives for residential property investors, yet it is often misunderstood. In simple terms, it allows a taxpayer to deduct a portion of the cost of certain new and unused residential rental units from taxable income over time.
SARS describes the allowance as 5% a year on a straight-line basis for qualifying units, with an additional 5% for qualifying low-cost residential units. For an investor in a new development, that can materially improve after-tax cash flow.
However, the allowance has strict requirements, and getting one or two of them wrong can invalidate the claim.
What Section 13sex is trying to do
The provision is aimed at encouraging the supply of rental housing. It applies to new and unused residential units, and also to certain new and unused improvements to residential units, provided the statutory requirements are met.
The core requirements
A taxpayer can generally claim Section 13sex only if all of the following are present:
• the unit is new and unused
• the taxpayer owns it
• it is situated in South Africa
• it is used solely for purposes of a trade carried on by the taxpayer
• the taxpayer owns at least 5 residential units in South Africa that are used for trade (e.g. a residential letting business)
That 5-unit threshold is important. SARS's interpretation note explains that if a taxpayer owns five qualifying units and later falls below five, the remaining units stop qualifying from the following year of assessment.
What “used solely for trade” means
The unit must be used only for the taxpayer's trade. If the owner lives in the property, even partly, the allowance is not available for that unit.
SARS states that no apportionment applies where a residential unit is partly used for trade and partly for non-trade purposes, such as owner occupation. In practice, this means Section 13sex is designed for genuine rental stock, not for a primary residence that is occasionally let out.
The deduction rate
For a standard qualifying residential unit, the deduction is 5% of the qualifying cost per year. This effectively writes the qualifying cost off over 20 years.
What amount qualifies
The deduction is based on the taxpayer's cost of a building on a residential property or qualifying improvement. As a general rule, the building element is what matters, not the land.
In the case of a sectional title unit, the cost for Section 13sex purposes is deemed to be 55% of the acquisition price.
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