With the 2020 tax filing season upon us, homeowners are entitled to certain claims for tax deductions if they are working from home. In these cases, the onus falls on the homeowner to substantiate the amounts deductible and to justify these claims by showing how he or she calculated these deductibles.
Adrian Goslett, Regional Director and CEO of RE/MAX Southern Africa says that although many homeowners will qualify for a tax deduction, it is sometimes a difficult task to establish the amount of interest on their bond that is tax deductible.
“In certain situations, however simple they may seem at first, there can be complications and queries that could arise. Homeowners should make certain that they know what they are doing, or if in doubt, should consult with a professional tax consultant” he says.
RE/MAX provides the following example to show homeowners a simplified overview of what could potentially be claimed back:
If you are working from your home which was purchased for R1 million and you use 20% of the property as a home office, you will be entitled to a tax deduction based on the interest charged on the remaining outstanding bond amount. If the interest on the bond is charged at 7%, you will be roughly be charged around R70 000 in interest for the year. Because 20% of the property is used as a home office, you would be entitled to claim 20% of the R70 000 (R14 000) as a tax deduction in the production of your income.
Should you decide to withdraw an amount from your bond (for example, R100 000) to finance personal expenses, you will not be able to take into account the tax amount of the additional money withdrawn, as this is not in the production of income.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 taken, going forward for all the years that you carry the bond. Essentially what this means is that a smaller percentage of the initial 20% of the interest reflected on the bond statement is tax deductible from then onwards. The percentage of deductible interest will continue to change as you make further withdrawals from the bond account for other non-income producing purposes.
On the flip side, if you have made a substantial payment on your bond, such as an inheritance pay out, you will not have the option to allocate your money to the 80% private portion of the bond and not impact the other 20% regarded for business use. The bond is regarded as one account that cannot be divided or proportioned into separate segments. This means that any money allocated to the bond account will reduce the balance along with the amount of interest owed for the year which will affect how much you are able to claim back in tax.
If you have any other loans that are not tax deductible, it may be a better option from a tax planning perspective to allocate the inheritance to pay off those loans instead.
In all these scenarios, Goslett warns homeowners that they will only qualify for a home office deduction if they are employed and a condition of the employment is to carry the cost of keeping a home office as the central business location.
“As a homeowner, figuring out tax deductibles can sometimes be a rather overwhelming experience. If there is ever any area of doubt, it is best to consult with a professional financial adviser or tax consultant who can provide guidance through the process,” Goslett concludes.