Inflation-Adjusted Tax Thresholds May Bring Relief on Rental Income
For international investors rental received for a holiday home or other property in the local market, is regarded as South African-sourced income and therefore taxed by the South African Revenue Service (SARS).
As a result, adjusting the tax thresholds for inflation in the 2026 Budget will influence how much income tax is payable on rental income generated from the South African property.
For the year ending February 2027, the Budget provides relief through increased tax thresholds for individuals under 65, from R95 750 to R99 000. This means total income below R99 000 per annum, are exempt from personal income tax.
Where property is co-owned with a spouse, rental income is split equally between the parties, unlike many other jurisdictions where joint fillings are required, effectively allowing a combined tax-free threshold of R198 000 per annum before personal income tax becomes payable.
Property owners are taxed on rental profit — not turnover. Deductions such as bond interest, municipal charges, levies, insurance and maintenance, to name a few, must be carefully considered to ensure only the correct net profit is declared and taxed.
Foreign property owners should ensure they are taxed only on South African-sourced income. Holding a non-resident bank account and registering with SARS as a non-resident taxpayer is important, as incorrect classification could expose non-residents to unintended worldwide tax obligations.
SARS Eyes the Profit on Property Sales
When foreigners sell property in South Africa, capital gains tax (CGT) always applies to any profit made on the sale.
However, South African law allows for an annual capital gains exclusion, exempting the first portion of the capital gain from tax. In the 2026 Budget, this exclusion has increased from R40 000 to R50 000.
In practice this means a seller can realise a profit of R297 500 on disposal without having to pay tax on that, provided they have no other taxable income in South Africa.
Where spouses co-own the property, the gain is split between them, effectively doubling the available tax-free threshold, i.e. R297 500 each.
Importantly, foreign property owners are also entitled to deduct costs incurred in acquiring, improving and disposing of the property. These include agent commission, legal fees and qualifying building improvements, to name a few.
Primary Residence Exclusion – Proceed with Caution
The primary residence capital gains exclusion has also been increased in the 2026 Budget, rising from R2 million to R3 million.
Two points are important here: Under certain circumstances and in limited instances a non-resident foreign national can make use of this CGT exemption. However, caution must be exercised when applying as it requires expert planning.
As the term overlaps with residence principles, incorrectly claiming the exemption may invite broader questions regarding the foreigner’s overall tax status. The increased exclusion is beneficial, but it must be applied carefully and with proper consideration of the wider tax position and factual requirements to consider the property as the applicant’s ordinary residence.
Note that although both spouses are entitled to the tax-free profit of R297 500 on disposal, the total R3 million CGT exemption is shared between the two spouses.
VAT Threshold Increase
Another significant development is the increase in the VAT registration threshold from R1 million to R2.3 million. Those who previously operated close to the R1 million threshold and now fall below R2.3 million may, from 1 April 2026, no longer be obligated to register for VAT. This reduces administrative complexity, compliance costs, and ongoing filing requirements.
While the higher threshold reduces compliance pressure, it may create disadvantages in certain investment scenarios. A foreign investor who is not VAT-registered cannot claim input VAT on property acquisitions, renovations, or ongoing operating expenses. This is particularly relevant in commercial property transactions where VAT is charged on acquisition. In such cases, non-registration can result in irrecoverable VAT costs, directly reducing the overall return on investment.
Being Below a Threshold Does Not Remove Compliance Obligations
One of the most common compliance errors made by foreign property owners is assuming that if no tax is payable, no filing is required. Even where rental profit as the only South African income falls below R99 000, or capital gain falls within the annual exclusion, a foreign property owner may still be required to register as a taxpayer and submit annual income tax returns.
Rental income does not constitute remuneration from a registered employer. As a result, property owners are generally classified as provisional taxpayers. An exception applies where rental from the letting of fixed property does not exceed R30 000 for the tax year.
If that threshold is exceeded for the 2026/27 period, the taxpayer must submit two provisional tax returns: the first provisional return before the last business day of August 2026 and the second provisional return before the last business day of February 2027 — followed by submission of an annual income tax return which standardly opens for submission in July 2027.
Failure to submit returns can result in penalties and interest, even where the final assessed tax liability is minimal or nil.
Tax Relief Has Increased, But Responsibility Remains Absolute
The 2026 Budget provides genuine relief for foreign property investors. However, this relief applies to liability and not to compliance.
For foreign nationals investing in the local property market, the greatest risk often lies in failing to structure, register and report correctly.
An annual review of your South African tax registration status, provisional tax requirements, capital gains exposure, residence classification and VAT position is essential to maintaining a compliant and defensible cross-border investment strategy.
