One of the questions I'm most often asked is “Should I invest in property using a company, or should I invest in my personal capacity?”
Whenever I hear this question I want to ask investors WHY they want to invest through a company.
You see, as with most things investing there's no clear cut, one-size-fits-all answer.
There are a number of things to consider before you invest as a company (or a Trust for that matter), compared to buying in your personal capacity…
What you need to know before investing in property using a company
Most people start out investing in property in their personal capacity.
The benefits are that you get an annual capital gains tax exclusion, you get to deduct many of the costs of owning the property from the income you generate, and you don’t have high admin costs in terms of audits and tax returns to file.
So, if you only own one or two investment properties it is often most beneficial to keep them in your personal capacity.
But you also pay tax on the profits at your personal tax rate, meaning it could be as high as 41%, which gets quite ridiculous really…
Here’s when you need to consider investing through a company
When you hit the point of three or four investment properties, a company starts to make sense.
Firstly, the tax you pay on the profits you make from rental income each month is only 28%.
Secondly, you can ‘loan money to the company for the purpose of buying more properties, and get a tax benefit on that too.
You see, individuals can get R23,800 interest income per year, tax free.
So, you could loan your company R238,000 to buy a property with. It then pays you R23,800 in interest, which is free of tax in your hands and it lowers the tax payable in the company’s hands.
Each of your family members, including your children, could do this and this would then lead more tax free income for you.
There are cons to doing things this way as well.
Firstly, you will have to get an accountant to sign off your financial statements for the company each year and submit annual returns to SARS and CIPC.
That means a roughly R2,000 – R5,000 extra expense per year.
You will also need a separate business bank account, which could cost you around R200 per month.
That’s why I say you need three or more properties before you consider a company.
Admin costs alone could be around R10,000 a year with a company.
So, if you only generate R80,000 a year from rental you’re paying 12.5% of your income in admin costs.
If you earn R240,000 a year, your admin costs only amount to 4.16%, and as you grow, your costs will lower as a percentage of the total income.
What you need to remember when you do this…
As I mentioned, in your personal capacity you get a R40,000 a year capital gain exclusion. In addition to this, you only pay capital gains tax at an effective rate of 18%.
That means, if you sell a property at a R100,000 capital gain you only pay R10,800 capital gains tax.
A company would pay R22,400 capital gains tax on the same capital gains. That’s more than double.
So, if you’re looking at buying and selling properties
instead of buying to let you could attract significantly more in capital gains tax in the long run if you use a company.
Before you make your choice, I suggest you speak to an accountant – consider all you specific financial needs and calculate what’s your most tax efficient option right now.
But remember, as you increase your number of property investments, the situation will change.
Here’s to unleashing real value