The best kept tax secret of rich property investors

| Article by Jacques Fouché - Chief executive and founder of the IGrow Group of Companies

Have you ever wondered how some investors can get millions back from SA Revenue Services (SARS) and become rich in the process?

Canny real estate investors legally leverage the Income Tax Act in their favour, to get SARS to pay them millions of rand back from their capital invested into their buy-to-let property portfolios.

Most investors see SARS as a huge great white shark, taking large bites out of their monthly cash flow through taxes. But if you are willing to make SARS an active roleplayer and partner in your property investment business you can get SARS to pay you back millions over your real estate career.

Tax incentives offered to investors by government act as an economic stimulus, to keep the wheels of the economy turning and to create more jobs and opportunities where there is a  demand or a shortage of infrastructure and economic activity. SARS is encouraging certain activities that benefit the economy and promote social policy. It’s our responsibility to take advantage of these tax laws.

SARS is actually on the side of the buy-to-let investors – it genuinely wants investors to pay less in taxes.

The massive tax advantage that you get from SARS is called Section 13Sex of the Income Tax Act. By putting your time, and investors strategy into activities that produce jobs, housing, and grow the economy, you get tax benefits.

SARS is effectively making a deal – if you are going to help us by providing affordable housing in South Africa which in turn helps us grow the economy, then we will make it worth your while by giving you money back – a lot of money.

The money back from SARS will help you in these ways:

• Cover the shortfalls on your properties.
• Save up for deposits more quickly and easily, because with more money you can save up for that next deposit on that next property a lot faster.
• Build up equity in your property, so you can buy the next property a lot sooner.
• Create more cash flow to ensure stability in the tough times.
• Help you retire financially free a lot faster – effectively helping you get hundreds of thousands of rand (and in some cases millions) back over your investment career.

These are the tax rules the wealthy real estate investors are playing with and working to their advantage.

Let SARS play the role of your business partner and actively help you build your portfolio. This is when you will start gaining the momentum and the unfair advantage, as SARS will fund and finance your real estate investment business.

So, how can you, as a buy to let property investor, qualify for this allowance?

There are four key requirements to qualify for the SARS sec 13sex tax incentive:

1. The unit must be new or unused (including a self-contained apartment) and mainly used for residential purposes. So no existing or second-hand properties will qualify for the tax incentive.

2. The unit must be used solely for the trade of the taxpayer – in other words, the taxpayer may not live in the property as their primary residence. This means it’s ideal for buy-to-let investors to rent it out to tenants.

3. The taxpayer must own at least five residential units, all of which must be used for the taxpayer’s trade. (Please note, you don’t need to buy all five simultaneously.)

4. The units must be in South Africa.

To illustrate how this incentive works, let’s look at some numbers showing what SARS will effectively give back to you every year and every month.

For every five properties investors buy, SARS allows a minimum of 55% of the purchase price as a tax deduction. So, if you were to buy five properties, for a million rand each:

5 x R1 million properties = R5m x 55% = R2.75m that SARS will allow you as tax deduction to reduce your tax liability.

This equates to an annual tax allowance for 20 years of R137 500, taxed at the 45% income marginal tax rate equals R61 875 a year (or effectively R5 156 a month) that SARS will help you to gain every year for 20 years.

As a smart investor, using this incentive you can build your property portfolio effectively tax-free until retirement.

Applying what I call the ‘stackable tax effect’ by using the allowable deductions, concessions, rebates and incentives in a strategic way to reduce your tax you will create a compounding tax effect in your portfolio and build substantial wealth at the same time.

SARS is there to make you rich in real estate, especially if you follow the rules of the rich.

So, go out there invest strategically, invest intelligently, become financially free and leave a legacy.

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