Types of property to invest in

There are basically three options from which to choose, namely a freehold dwelling, sectional-title unit or a cluster home. Although all types of property may be rented, flats and townhouses, which are typically sectional-title units, tend to be popular with the residential investor because there is a larger target market, and they tend to be easier to manage than clusters and freehold dwellings. Your own particular investment preference will, however, determine the final choice.

A freehold property is normally registered in your own name and you are free to manage your property independently within the bylaws and legislation. You are also responsible for the maintenance and improvements. A cluster home and vacant land are also classified as freehold properties. If you opt for sectional-title ownership, you buy more than _lust the unit. You share common property such as gardens, swimming pools and security. For this you'll pay a monthly levy to meet running costs. Administration and maintenance of the complex and common property are the responsibility of the body corporate. Trustees, who are elected by unit owners, represent the body corporate. You are responsible for the upkeep of your own unit.

Ownership options

Registering a property in your name or jointly with another person is the easiest and most common way of owning property. Other alternatives include purchasing a property in a company. close corporation or trust. Lip to 12 December 2002 the sale of:

•           a member's interest in a dose corporation;

•           a beneficial interest in a trust; or

•           shares in a company,

attracted no payment of transfer duty on the transfer of the property and only 1% on the transfer of the shares. This position has changed and transfer duty on the sale of the interest is now payable at a raw of 10%, which has to be paid within six months of the date of conclusion of the offer to purchase.

In the past, although the initial transfer duty was (and still is) 10%, subsequent transfers would be at 1%. Therefore acquiring a property-owning legal entity instead of the property itself enabled buyers to escape the transfer duty net. Purchasing a residential property through a legal entity is now financially unattractive.

Buying a property in a close corporation, company or trust also brings about the danger of buying a tainted company, that is an entity with undisclosed liabilities, debts not yet at judgment stage or sureties for which the entity is still liable. Legal entities do have the advantage of having their own separate legal personalities. In practice, however, lenders or creditors generally require some form of personal surety from the directors, shareholders or members, which negates any advantage. Close corporations, companies and trusts may offer estate planning advantages, but as the Financial, estate planning and taxation requirements of each investor differ, professional advice in this regard is recommended.

Taxation

Capital gains tax was introduced in South Africa on 1 October 2001. This is a tax paid on the profits made on the sale of any asset, including residential property. If you purchase a property for your own personal occupation as your primary residence, you are exempt from capital gains tax unless you make a gain or loss in excess of 111 million when you sell the property. Each year individuals are entitled to make a gain of up to R10 000 tax-free. if you make a gain of greater than R10 000 and you are an individual, you have to include 25% of the net gain when calculating the tax payable. For companies, close corporations and trusts 50% of the net gain is included when calculating the tax payable. Remember, you will only pay tax on the profit you make, not the total proceeds from the sale. This means you can deduct the cost of buying and maintaining the property from the amount you realise at the sale. It is therefore essential that you keep all important documentation and receipts of expenses relating to the purchase and improvements

Residential rentals are exempt from VAT, regardless of whether or not the landlord is a VAT vendor. The rental income will be liable for Income tax, but any loan interest may be set off against rental income for tax purposes. The interest portion of your loan will be disclosed in your Nedbank Buy To Let loan statement. Expenses related to the property may also be tax-deductible. Once again the financial, estate planning and taxation requirements of each investor differ and professional advice In this regard is recommended.