Section 13sex: The Tax Incentive Most SA Property Investors Have Never Heard Of

Section 13sex of the Income Tax Act is one of the most powerful and least-claimed tax incentives available to South African residential property investors. If you own five or more new residential rental units, SARS allows you to deduct 5% of the building cost from your taxable income every year for 20 years. At the top marginal rate of 45%, that is a tax saving worth up to 45% of the building cost over the allowance period — delivered without any additional capital outlay.

How Much Could You Save? — At a Glance

The table below shows the annual deduction and annual tax saving at three common marginal rates for different qualifying building cost amounts. The allowance runs for 20 years (5% per annum) on standard residential units.

Building cost = cost of structure only, excluding land. Annual deduction = 5% × building cost. Tax saving = deduction × marginal rate. 20-year total assumes constant marginal rate throughout. Note: recoupment applies on disposal — consult a registered tax practitioner before claiming.

What Is Section 13sex?

Section 13sex was introduced to encourage private investors to add new residential housing stock to the South African market. The principle is straightforward: if you invest in new residential properties and rent them out, SARS allows you to deduct a portion of the building cost from your taxable income each year. Over 20 years, this significantly reduces the income tax you pay on rental profits from those properties.

The allowance is granted on the cost of the building — not the land — at 5% per year for standard residential units or 10% per year for qualifying low-cost residential units. At 5% per year, the full building cost is deducted over 20 years; at 10%, over 10 years. The annual deduction directly reduces your taxable income, producing a tax saving equal to the deduction multiplied by your marginal tax rate.

To illustrate: an investor at the 36% marginal tax bracket who qualifies for a Section 13sex allowance on R1,200,000 of building cost can claim R60,000 per year in deductions (5% × R1,200,000). The tax saving is R21,600 per year (36% × R60,000). Over 20 years, the cumulative tax saved is R432,000 — a significant addition to the investment’s total return that requires no additional capital outlay. Use our Section 13sex Calculator to model your specific figures.

The Five-Unit Threshold in Detail

The five-unit test applies to your aggregate qualifying portfolio. An investor who owns three qualifying units now and acquires two more new units triggers the allowance on all five from the date the fifth qualifying unit is acquired. This creates a planning opportunity: investors approaching the threshold should consider the timing and sequencing of acquisitions to trigger the allowance on the full qualifying portfolio simultaneously.

Units held through different legal entities — personal ownership, a company, and a trust — are generally not pooled for the five-unit test. Each entity is assessed separately. This structural point must be confirmed with a registered tax practitioner before the acquisition strategy is planned, particularly if you are distributing your property portfolio across multiple ownership structures for estate planning or liability management purposes.

Both self-employed and salaried investors can claim the allowance, provided the rental income is declared as trade income rather than passive investment income. If you have historically declared rental income as simply “rent received” without treating it as a trade, discuss the classification with a tax practitioner before applying the Section 13sex allowance.

What Costs Are Deductible?

The deductible cost is the cost of the building, not the total purchase price. For newly built properties, the building cost is typically specified separately in the deed of sale by the developer. If it is not specified, the Act provides a deemed-cost basis where the land component is assumed to be a fixed proportion of the total price. Having the developer specify the building cost separately in the sale agreement is generally more favourable than the deemed-cost basis and is worth requesting on every new-build acquisition.

Where an investor directly commissions new construction — a block of flats or cluster development — the qualifying cost is the direct construction cost supported by building contracts, invoices, and payment records. The land cost is excluded. All supporting documentation should be retained for the full period of ownership and beyond, as SARS can request substantiation of allowance claims at any point during the prescription period.

Costs of improvements made after acquisition can also qualify for the allowance under related provisions, provided the improvements extend or enhance the property rather than merely maintaining it. The distinction between a capital improvement (qualifies) and a repair (does not qualify) is the same as for CGT base cost purposes: replacing like-for-like is a repair; adding to or materially upgrading is a capital improvement.

Section 13sex vs Section 13quat

Section 13quat is the companion incentive for urban development zones (UDZ) — designated areas in SA’s city centres where government wishes to stimulate private investment in refurbishment and new construction. Section 13quat offers an accelerated deduction on qualifying expenditure in these zones at rates of 20% in year one and 8% per year thereafter (for refurbishment), or 20% in year one and 5% per year thereafter (for new construction in a UDZ).

The key differences: Section 13sex applies anywhere in South Africa to new residential units; Section 13quat applies only in designated UDZ areas but covers both residential and commercial properties, and at potentially more accelerated rates. For investors acquiring property in Cape Town’s CBD, Johannesburg inner city, or other designated UDZ areas, Section 13quat may offer a faster deduction cycle. Investors outside UDZ areas rely exclusively on Section 13sex for the residential building allowance. Both incentives can apply simultaneously if the property meets all qualifying criteria for both — confirm with a registered tax practitioner.

Common Mistakes When Claiming

Claiming on second-hand properties. The most common and costliest mistake. Section 13sex applies strictly to new and unused units — a recently built property that was previously owned or occupied, even briefly, does not qualify. A developer’s show home used as a display unit and then sold does not qualify. Confirm the unit’s new-and-unused status in writing from the developer before relying on the allowance.

Failing to retain documentation. SARS can query the basis for the allowance years after the first claim, and if the documentation is not available, the deduction may be disallowed retroactively with interest and penalties. For a large portfolio with significant annual deductions, this risk is material. Document everything at acquisition: the developer’s building cost specification, the sale agreement, and proof of first occupation by a paying tenant.

Not informing your tax practitioner. Many accountants who handle personal tax returns for salaried employees do not routinely prompt clients about Section 13sex unless the client raises it. If you have qualifying properties and your tax practitioner has not discussed this allowance with you, raise it explicitly at your next tax consultation — and provide them with the details of your qualifying portfolio, the building cost on each, and the year in which the allowance was first triggered.