It’s not every day that residential property, taxes, and an unusual-sounding section of the tax code come up in the same sentence. But trust me, this is worth your attention – especially if you’re in South Africa and looking for ways to boost your tax efficiency.
The Section 13sex tax deduction can be a game-changer for property investors. Let’s explore how this works, who can benefit, and what it means for your pocket.
What Is the Section 13sex Tax Deduction?
Section 13sex is a special tax allowance provided by SARS (South African Revenue Service). If you own residential properties that meet certain criteria, you can deduct 5% of their cost from your taxable income every year.
This deduction is designed to encourage property investment and development in South Africa.
Who Qualifies for the Section 13sex Deduction?
To qualify, you must meet these key requirements:
- You own at least five residential units used for trade purposes.
- The units must be new and unused or involve improvements that are also new.
- The properties must be located in South Africa.
- The units must be used exclusively for trade purposes, like renting them out.
How to Calculate “Cost” for Section 13sex
The “cost” of the unit isn’t just the sticker price. SARS calculates it as the lower of:
- The direct cost of acquiring or building the unit.
- The unit’s market value at the time.
If the units were purchased instead of built, the calculation adjusts as follows:
| Type | Deduction Base |
|---|---|
| Purchased unit | 55% of acquisition cost |
| Improvements only | 30% of acquisition cost |
Key Benefits of Section 13sex
- Lower Taxable Income: Each year, you can claim 5% of the qualifying cost as a deduction.
- No Recoupment: When you sell the property, there’s no tax clawback on the deductions claimed.
- Additional Allowance for Low-Cost Housing: An extra 5% deduction if your property qualifies as low-cost housing.
What Counts as Low-Cost Housing?
To qualify, your property must meet these criteria:
- Apartments: Cost less than R250,000 per unit, with a rental cap of 1% of the cost per month.
- Buildings: Cost less than R200,000 per unit, with the same rental cap as apartments.
Pro Tip: SARS assumes the base cost increases by 10% annually, so the rental cap also adjusts upward over time.
Example: How Section 13sex Works in Practice
Let’s break it down with an example.
Scenario 1: Improvements Only
ABC Investments (Pty) Ltd upgrades 20 existing flats, spending R1 million per flat. Each flat sells for R4 million.
David buys 5 of these units and rents them out for R12,000/month. Here’s how his deduction looks:
| Calculation | Result |
|---|---|
| Deemed Cost | R4M × 5 units × 30% = R6M |
| Deduction Per Year | R6M × 5% = R300,000 |
Scenario 2: New Units
If ABC Investments built the units from scratch and sold them as new and unused, David’s deduction changes:
| Calculation | Result |
|---|---|
| Deemed Cost | R4M × 5 units × 55% = R11M |
| Deduction Per Year | R11M × 5% = R550,000 |
What Happens If You Sell the Properties?
Once you sell the residential units, the annual Section 13sex deduction stops. However, here’s the kicker: you don’t need to pay back the deductions you’ve already claimed. This makes the incentive even more appealing.
Common Questions About Section 13sex
1. Can I Claim If I Own Less Than Five Units?
Unfortunately, no. Section 13sex applies only if you own five or more qualifying units.
2. What If I Use the Units Personally?
Units used for personal purposes, like your primary residence, don’t qualify. They must be used exclusively for trade (e.g., renting them out).
3. How Do I Claim the Deduction?
You’ll need proper records of acquisition or construction costs. Work with a tax advisor to ensure compliance with SARS requirements.
4. Can I Claim for Second-Hand Units?
Second-hand units don’t qualify unless you’ve made new and unused improvements to them.
Why Section 13sex Is a Big Deal for Property Investors
This deduction isn’t just a tax break—it’s a tool to:
- Boost your cash flow by reducing your taxable income.
- Encourage investment in residential properties.
- Make low-cost housing projects more appealing.
For example, if you’re a property developer or landlord managing multiple units, Section 13sex can significantly improve your bottom line.
Tips to Maximise Your Section 13sex Benefits
- Plan Ahead: Make sure your projects involve at least five units to qualify.
- Keep Records: Maintain detailed invoices and records of costs.
- Work with Experts: Hire a tax consultant to handle the complexities.
- Think Long-Term: Consider how the annual 5% deduction fits into your investment strategy.
Why Low-Cost Housing Deserves Extra Attention
Low-cost housing qualifies for an extra 5% deduction, making it even more attractive.
Here’s an example:
- You build 10 apartments, each costing R200,000.
- You rent them out for R2,000/month (1% of cost).
- Your deduction jumps to 10% annually, doubling your tax savings.
Final Thoughts on Section 13sex and Residential Property
If you own multiple rental units, the Section 13sex tax deduction is one of the best ways to reduce your taxable income while investing in South Africa’s residential property market.
By understanding the rules and planning your investments strategically, you can unlock significant savings.
