Last chance for investors to jump on UDZ tax breaks
First introduced in 2003, the UDZ – or Urban Development Zone tax incentive – was created to entice investors into urban and inner-city renewal projects. Since then, countless businesses and individuals have enjoyed significant tax breaks (up to 55% of purchase value) for investing in developments within UDZ areas.
With its March 2020 expiry date looming, however, the days of taking advantage of UDZ opportunities are officially numbered. Managing Director of Rawson Developers, Carl Nortje, explains why investors should be getting in on the action before time runs out.
“The first thing to understand about the UDZ is that its benefits span an 11-year period,” says Nortje. “Investors that meet the qualification criteria can claim 20% of their UDZ tax deduction in the first year, and 8% annually for the subsequent ten. The UDZ expiry date will not affect those ongoing benefits, and – as long as transfer takes place before 31 March 2020 – investors will still be able to take full advantage of their 11 years’ worth of deductions.”
The financial impact of these UDZ deductions can be momentous for investors looking to reduce their overall tax burden. Depending on the size of the original investment, it can even create an assessed loss for a tax year.
“UDZ is not limited to taxable income,” Nortje explains. “If your UDZ allowance exceeds your local taxable income, the remainder of the deduction carries over each year until it’s fully absorbed. This is obviously more likely to occur during the first year of your investment – it has a much larger deduction allowance – but even small deductions can be very valuable financial tools.”
These tools could prove even more valuable to South African expats, who may soon be faced with up to 45% local income tax on foreign earnings over R1million.
“The new expat tax is scheduled to come into effect in March 2020 – right around the time that the UDZ expires,” says Nortje. “If they act quickly – before that cut-off date – expats could reduce the impact of those new taxes for the next 11 years by investing in a UDZ rental property or two.”
A single UDZ rental property valued at R2million would qualify for a tax deduction of R220k in its first year, and R88k a year for the next 10 years. This, alone, could drop an expat’s taxable income below the R1million threshold – or at least reduce it to a more palatable figure.
(View an example of UDZ tax benefit calculations, here.)
Of course, the appeal of UDZ properties isn’t limited to tax breaks only. Nortje says their location in urban renewal hotspots typically results in excellent rental growth prospects and long-term appreciation. This, together with the relatively depressed pre-election market currently at play, could offer investors a rare opportunity to buy low and reap growing rewards.
Those hoping to buy or develop UDZ properties and resell early for a quick profit may want to rethink their investment strategy, however.
“UDZ rental properties perform best as long-term investments, because, while they offer great tax breaks on purchase and have excellent appreciation potential, they do increase the capital gains tax that you pay down the line,” says Nortje.
“Essentially, any UDZ deductions that you claim over the course of your ownership are added to your capital gains tax bill when you sell. The longer your ownership period, the less impact this has on the overall performance of your asset, but if you sell shortly after purchasing, it can dent your bottom line.”
For those willing to stay the term, Nortje says UDZ properties are frequently top performers in their class – particularly in Cape Town.
“We have some thriving pockets of urban renewal in this city, many of which are UDZs,” he says. “A quality property by a trustworthy developer in any of these areas could easily be one of the smartest investments a buyer ever makes.”
Rawson Developers currently has one UDZ development on the market. The Winchester is located in Observatory – a prime example of the type of thriving community successful urban renewal projects create.
The City of Cape Town has two Urban Development Zones.
The first encompasses most of the historic CBD, and properties adjacent to the Main Road and Klipfontein Corridors. It includes portions of Salt River, Woodstock, Observatory, Maitland, Mowbray, Athlone and Gatesville. View the map, here.
The second is centred on the older part of the Bellville CBD, and includes land adjacent to the Voortrekker Road Corridor, around Bellville Station, and some properties along Modderdam and Kasselsvlei Roads. View the map, here.
For further information on using the UDZ tax allowance, contact Rawson Developers by emailing: info@rawson-developers.co.za
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