Real Estate Investor Magazine South Africa May/ June 2020 | Page 50

INVESTOR INTELLIGENCE
Don’t delay or
you’ll pay
What to do if your property portfolio is
structured incorrectly
JACO GROBBELAAR
Let’s catch up
In our previous articles, we discussed why your property
investments should be in a legal structure. We also
discussed the advantages and disadvantages of investing
in a legal structure, how tax works within your legal
structures, the conduit principle and how one can
significantly reduce income tax and capital gains tax with
trusts. Additionally, we explained how trusts can help you
with estate planning and how expensive it is to die if the
correct structuring is not in place.
Alfred D Chandler Jr said, “Unless structure follows
strategy, inefficiency results.” Perhaps you have a property
investment strategy. But what if your property portfolio is
in your name instead of an investment structure? Simple!
You have to restructure. While restructuring can become
expensive, it is necessary because the longer you delay,
the bigger your problem will become and the higher your
costs will be.
HOW TO RESTRUCTURE YOUR PROPERTY PROTFOLIO
Selling properties to your structure
The easiest and most common restructuring approach is to
sell properties to your structure. The trust or trust-owned
company will be the purchaser, and the individual will be
the seller.
If you are selling your primary residence to your
structure to rent it, the first R2,000,000 capital gain is
exempted. You can also utilise the R40,000 capital gains
tax exemption per year per person to reduce capital gains
taxes.
In general, this approach makes sense for cheaper
properties where transfer duties and capital gains tax are not
so significant, for example, properties with a value below
R1,000,000 and insignificant capital gains. This approach,
however, does become expensive for more expensive
properties and properties with large capital gains.
The funds made available can be lent to the structure
and parked in the access bond to not incur unnecessary
interest on the now higher bond. You can use these parked
funds as reserves for emergencies, to cover shortfalls, for
deposits and transfer fees to acquire additional property.
Take note, the loan from the individual to the structure
incurs a deemed interest, which is a taxable income in your
name. There are, however, exemptions on interest income
as well as other exemptions that could be applied to
reduce these taxes (even to zero rands).
When an individual sells the property to their structure
You do not need an agent to assist you with this, but you
will need a conveyancing attorney to facilitate the transfer.
If a new bond is taken out in the name of the trust, the
banks will also allocate a bond registration attorney. Original Purchase Price: R900,000
Current Market Value: R1,000,000
Outstanding Bond: R700,000
Property Type: Investment Property
Ownership: Own Name
“While restructuring can
become expensive, it is
necessary because the longer
you delay, the bigger your
problem will become and the
higher your costs will be.” Transfer Costs: ±R22,000
Transfer Duties: R0
Bond Registration Costs: ±R28,000
Bond Cancellation Costs: ±R4,000
Capital Gains Tax: ±R8,000
[R1,000,000 (Selling Price) – R900,000 (Purchase Price)
– R40,000 (Annual Capital Gain Exemption)] x 40%
(Inclusion Rate) x 35% (Tax Rate on Tax Bracket for this
Example) = ±R62,000 (Total Restructuring Costs)

Advantages
It enables you to move your assets (and liabilities) out
of your name and into the correct structure. Secondly,
it enables you to take out new bonds up to the market
value of the property, which could make significant capital
available.
Disadvantages
You will incur fees such as transfer, bond registration, and
bond cancellation fees. Secondly, capital gains tax may
apply.
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MAY/JUNE 2020 SA Real Estate Investor Magazine

If this were a primary residence, the capital gains tax
for the first R2,000,000 would not apply.
If spouses jointly own the property, the R40,000
(Annual Capital Gain Exemption) can be deducted
twice, and they can split the taxable capital gain
between them.
[R1,000,000 (Market Value) – R700,000 (Outstanding
Bond)] = R300,000 (Capital Made Available)
[R1,000,000 (Market Value) – R700,000 (Outstanding
Bond) – R62,00 (Restructuring Costs)] = R238,000
(Capital Available After Costs are Covered)
SA Real Estate Investor Magazine MAY/JUNE 2020
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