UDZ Tax Incentive Guide (Get Cash Back on CT Property)

UDZ Tax Incentive Guide (Get Cash Back on CT Property)

Category Market Insight

The UDZ tax incentive is one of the Cape Town property market's best-kept secrets. If leveraged fully, you can claim massive income tax deductions based on your property costs. Developers and those buying off-plan have been taking advantage of this incentive since its announcement. Find out how you can too.

What Is the Urban Development Zone (UDZ) Tax Incentive?

According to the City of Cape Town, the UDZ tax incentive is a scheme administered by SARS to encourage residential and commercial improvement in the inner city. The area demarcated for the incentive is expansive. It spans approximately 41.8 hectares of specified even incorporating parts of Rosebank, Woodstock, Observatory, City Bowl and more (See a full list of qualifying erf numbers). 

How to Qualify for UDZ Tax Incentive?

In order to qualify for the UDZ tax incentive, a number of requirements must be met. The requirement set out by SARS may seem challenging at first but it's as simple as checking items off of a list! Use the below checklist to see if your property qualifies:

• The building/improvement must be used for trade (this includes letting of the residential property).
• If buying from a developer, the building/improvement has been used to claim for the UDZ tax incentive before coming to your ownership.
• The improvement to your property must have commenced after the date the Minister of Finance signed the scheme into effect (the 14th of October 2004).
• The purchase agreement for the property must have been concluded on or after the 8th of November 2005.

In addition to the above, the improvement made to your property must meet one of the following building requirements to qualify under section 13quat: 

1. It must be a newly erected residential or commercial building.
2. If your building/improvement is an extension or addition to an existing structure it must represent a floor area of 1000 m2 or more.
3. If your building is bought directly from a developer it must -
   • be a newly erected structure or extension of an existing building.
   • represent a floor area of 1000 m2 or more where the developer has made an improvement to an existing structure.
   • have cost the developer at least 20% of their purchase price in the case that the property is an improvement of an existing building or part thereof.
   • not have been used to previously claim for any UDZ tax incentive.

Disclaimer: the above represents our best efforts to put SARS's requirement into plain English and is not a substitute for the letter of the law. For exact wording and phrasing please refer to their official website.

UDZ Tax Incentive in Action

At this point, you may be imagining scenarios in which you could take advantage of the UDZ tax incentive. The scheme is far-reaching and can cover many different cases. So, let's unpack some practical examples to get an idea of how you might be able to benefit:

• Erecting a Granny Flat

Let's say you purchased a free-standing house to live in on a qualifying erf: on this plot, you may decide to build a granny flat with a separate entrance to rent out. After securing a tenant you can then submit your application to SARS. On improvements like this, you can qualify for 20% of the construction cost in the first year and 8% every year thereafter for 10 years. This totals an incredible 100% of the property improvement costs! 

• Erecting Low-Cost Residential Units

This is an interesting one that can allow you to achieve the same 100% as the granny flat example. However, it will allow you to cut the recoupment-of-cost period down from 11 years in total to 7 years in total. This case is almost identical to that of the granny flat above but with some additional cost considerations. The granny flat must qualify as low-cost housing. To qualify as low-cost housing, the cost of erecting the granny flat must not exceed R350,000 and the rent must not exceed 1% of the cost.

UDZ Tax Incentive Top Tip: The scheme gives you, the owner, cashback in the form of income tax deductions. That doesn't mean only the income tax payable for the rental property. It means all of your income tax combined. So, if your payable income tax is less than the recoverable cost, you will not be able to recover 100% of the costs.

How Much Time Is Left?

The clock is ticking! The UDZ tax incentive programme is available for a limited time only. Thankfully, the programme was extended by the Minister of Finance to the 31st of March 2023. If you decide to take advantage of the UDZ tax incentive, you can reduce your overall costs and use the capital savings to build your property portfolio quickly. You can gear up your investment rate even further by combining these incentives with the BRRRR method of property investment! To help you manage your income generating rental properties, be sure to partner up with an experienced rental management company to cut down on admin.

Author: Paul Wasson