|
by Liesl Winter
In 2004 the Income Tax Act created a new incentive for investors. The intention was to rejuvenate the inner cities’ economies and the method was to entice investors to buy residential property in defined areas called Urban Development Zones, UDZs.
UDZs, areas with high population potential and close proximity to public transport, have been demarcated in the Metro municipalities. In Cape Town, the UDZs include parts of the CBD and East City, Salt River, Woodstock, Observatory, Maitland up to the railway bridge, Mowbray, Athlone and Gatesville, and the Voortrekker Road vicinity in Bellville.
In the UDZs an allowance is granted to purchasers who intend to rent the property out. In essence the allowance is an accelerated depreciation. Normally, depreciation can only be claimed over an extended period of time, usually based on the useful life of the asset. But within a UDZ, depreciation is higher in the first few years of the asset’s lifespan, bringing the taxable income of the investor down during that period.
The allowance is the percentage of the purchase price deemed to be attributable to the cost of refurbishment or construction. In the case of a new building, a whopping 55% of the purchase price is not taxed. For refurbishing an existing building, 30%.
There are down sides. An investor who sells the property will lose the UDZ allowance (as of the assessment year after the year of sale), and allowances already received are subject to recoupment and to CGT.
Furthermore, an investor who ceases to utilise the property solely for the purposes of trade – ie one who occupies it personally -- will no longer be able to claim the allowance.
What the allowance achieves, when combined with mortgage finance, is that investors (with a steady rental inflow) can enjoy a capital appreciation without spending a cent!
This year’s Budget creates a further incentive with a reduction in Transfer Duty. For purchases in excess of R1.5 million, individuals achieve a saving of R28 000, and corporate entities R83 000! |
