Real Estate Investment Trusts (REITs) are popular investment vehicles that allow investors to invest in real estate without actually owning or managing properties.
They are regulated investment entities that own or finance income-generating real estate assets.
REITs have gained popularity in South Africa due to the benefits they offer investors, such as regular income streams and portfolio diversification. However, investing in REITs can have tax implications that investors need to be aware of.
In this article, we will explore the tax implications of investing in a REIT in South Africa.
What is a Real Estate Investment Trust?
A Real Estate Investment Trust (REIT) is a company that owns and manages a portfolio of income-generating real estate assets, such as shopping centers, office buildings, apartments, and hotels.
REITs allow investors to invest in real estate without owning or managing properties themselves. Instead, they can buy shares in a REIT, which gives them exposure to the underlying real estate assets.
REITs are regulated investment entities that are required to distribute a significant portion of their taxable income to shareholders in the form of dividends.
Types of REITs
In South Africa, there are two types of REITs: property loan stock (PLS) companies and property unit trusts (PUTs).
PLS companies are listed companies that own and manage properties directly, while PUTs are collective investment schemes that own and manage properties on behalf of unit holders.
Both types of REITs are required to distribute at least 75% of their taxable income to shareholders in the form of dividends.
Tax Implications of Investing in a REIT
Investing in a REIT can have tax implications for investors. Here are some of the tax implications to consider:
Dividend income received from a REIT is subject to dividend tax in South Africa. The dividend tax rate is currently 20%.
This means that if you receive R1,000 in dividends from a REIT, you will pay R200 in dividend tax.
Capital Gains Tax
When you sell your REIT shares, you may be liable for capital gains tax (CGT). The CGT rate for individuals in South Africa is currently 18%, and the CGT rate for companies is 22.4%.
However, the first R40,000 of your capital gain is exempt from CGT.
REITs are required to distribute at least 75% of their taxable income to shareholders in the form of dividends.
If you are a South African resident taxpayer, you will pay tax on your REIT dividends at your marginal income tax rate. The marginal income tax rate is the highest tax rate that applies to your income.
Value-Added Tax (VAT)
REITs are not subject to VAT in South Africa. This means that if you buy or sell REIT shares, you will not pay VAT on the transaction.
Tax Benefits of Investing in a REIT
Despite the tax implications of investing in a REIT, there are also tax benefits to consider. Here are some of the tax benefits of investing in a REIT:
Tax-Free Savings Account (TFSA)
If you invest in a REIT through a Tax-Free Savings Account (TFSA), you can receive tax-free dividends and capital gains.
A TFSA is a savings account that allows you to save and invest money without paying tax on the growth, dividends, or interest.
If you own REIT shares as part of a business or investment portfolio, you may be able to deduct expenses related to the investment, such as brokerage fees or professional advice fees.
These deductions can reduce your taxable income, and therefore reduce the amount of tax you pay.
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