How Section 13sex can ease your tax burden

With the combination of an emerging middle class, a marginal interest rate increase in 2022 being predicted by economists and the ongoing shortage of affordable housing, conditions are ideal for buyers to purchase a new property or for investors to expand their property portfolio.

#1 - What is 13sex?

Under section 13sex of the Income Tax Act No. 58 of 1962, the South African Revenue Service (SARS) grants a considerable tax advantage to taxpayers who purchase new and unused residential units or improve any residential unit, purchased on, or built after 21 October 2008.

To be eligible for this tax incentive, certain criteria need to be met and these include:

• Owning at least five residential properties, not necessarily all purchased simultaneously - the tax incentive applies once the 5th property has been bought.
• Ownership by one individual or entity
• New and previously unoccupied units
• The property is a business investment (namely rental income) and cannot be the primary owner's residence
• Properties owned in South Africa only

#2 - What are the tax benefits?

Section 13sex states "costs incurred by a taxpayer on a residential unit if the taxpayer acquires a residential unit (or improvements to a residential unit) representing only a part of a building, without erecting or constructing the unit or improvement" - these costs are calculated as follows:

• 55% of the total cost (acquisition price) where a new unit is acquired, or
• 30% of the acquisition price where an improvement is acquired.

The total cost is determined as the lower market value, or the actual cost incurred on the day of closure of the transaction, which prevents inflation of prices to gain higher deductions.

#3 - Important points to keep in mind

Investors need to compare the benefits of purchasing property under sectional title versus full title. For the former, SARS offers 55% back on the purchase price of the property, claimed back over a period of 20 years and with full title ownership, taxpayers may only claim on the building as the value of the land does not depreciate which could amount to up to 80% of the building cost, depending on the cost of the land, claimed back over a period of 20 years.

To take full advantage of Section 13sex, investors need to bear in mind that property should be purchased as a long-term investment to provide optimum financial relief.

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