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Wednesday Mar 30, 2016

Do your homework and score homeowner tax deductions

As another financial year draws to a close, taxpayers will be getting their affairs in order and getting ready to submit their tax returns.

Many will be assessing their financial situations and looking at the tax deductions they will be able to claim back from the SA Revenue Services. Taxpayers are entitled to claim deductions, but the onus is on them to prove that a particular amount is deductible, and they need to justify the claim by showing the calculation of how they arrived at the deduction figure.

Regional director and chief executive of RE/MAX of Southern Africa, Adrian Goslett, says that although many homeowners will qualify for tax deductions, it is sometimes difficult to establish the amount of interest on bonds that is tax deductible.

"In certain situations, however simple they may seem at first, there can be complications and queries that could possibly arise. Therefore you need to make doubly sure you know what you are doing, or if you are in doubt you should consult a professional tax consultant," says Goslett.

Working on a home bought for R1 million, Goslett says that if you work from home and use 20 percent of the property as a home office based on the square meterage calculation, you will be entitled to a tax deduction based on the interest charged on the remaining outstanding bond amount.

"If you have paid off a portion of the bond and owe R800 000 and the interest on the bond is charged at 14 percent, you will be charged R112 000 interest for the year. Because 20 percent of the property is used as a home office, you would be entitled to claim 20 percent of the R112 000 as a tax deduction in the production of income," says Goslett.

It's important to remember that you will only qualify for a home office deduction if you are employed; working for a salary and a condition of the employment is to carry the cost of keeping a home office as the homeowner's central business location.

Goslett says that if you owe R800 000 on your bond and then decide to draw a further R100 000 to finance personal expenses, you won't be able to take into account the tax amount on the additional money taken, as this is not in the production of income.

"Any interest charged on the additional R100 000 will be excluded from the calculation of deductible interest from the time it is taken, for all the years you carry the bond. Essentially this means that a smaller percentage of the initial 20 percent of the interest reflected on the bond statement is tax deductible from then onwards," Goslett says.

"The percentage of deductible interest will continue to change as you make further withdrawals from your bond account for other nonincome producing purposes."

According to Goslett, on the flip side of the coin where you would like to make a substantial payment into your bond, such as an inheritance payout for example, you won't have the option to allocate your money to the 80 percent private portion on the bond and not affect the other 20 percent that is regarded as business use.

"You may want to only pay the money towards the 80 percent to maintain the value of the deductible portion of the bond. However, this is not possible as the bond is regarded as one account that cannot be divided into separate segments. Regardless of how the home is divided and what percentage is for personal use and what percentage is for business use, the bond is over the entire property. This means that any money allocated to the bond account will reduce the balance of the bond in its entirety," says Goslett.

"If you have any other loans that are not tax-deductible, it might be a better option from a tax planning perspective to allocate the inheritance to pay off those loans instead."

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