Consider the following example of how restructuring will look when selling a property to an investment structure .
Original Purchase Price = R900,000 Current Market Value = R1,000,000 Outstanding Bond = R700,000
Property Type : Investment Property Ownership : Personal Name
Transfer Costs = ± R24,000 Transfer Duties = R0 Bond Registration Costs = ± R30,000 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 )]
Capital Made Available
( Before Restructuring Costs ) = R300,000
The available R300,000 can be lent to the structure and parked in the access bond to avoid unnecessary interest on the higher bond . You can use these parked funds as reserves for emergencies , cover shortfalls , 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 . However , exemptions on interest income and other exemptions could be applied to reduce these taxes ( even to zero ).
We can see that the above approach will not make financial sense with a more expensive property with significant capital gains since the acquisition ( transfer duties and capital gains tax become too much ). One could then look at transferring the property to your structure as an asset-for-share transaction ( Section 42 of the Income Tax Act ).
An asset-for-share transaction makes it possible to transfer property from your name to a private company without paying income tax on capital gains or transfer duties by allowing a person to transfer properties to a new company in exchange for shares issued by the company .
This , however , is not a clean solution , albeit a much more affordable solution for expensive properties , as you would still need to hold shares of the company in your personal capacity . If you do end up implementing an asset-for-share transaction , it would be prudent to consider restructuring your estate to ultimately hold the shares through an inter vivos ( a living trust ) Holdings Trust .
In the end , property investment can be lucrative and rewarding ( and just plain fun ) when your property investment portfolio is structured correctly !
SOURCES Prosperity Enterprises
30 MARCH 2022 SA Real Estate Investor Magazine