Testing deductions and losses on family rentals

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Testing deductions and losses on family rentals

• 28 October 2026
• Individuals Tax
• Dr Stiaan Klue

Source: TaxCafe, Carmen Westermeyer CA(SA), October 2026. Available on Webinar-on-Demand: TaxCafe with Carmen Westermeyer - October 2026

At a glance

Letting property to a family member at a reduced rent can combine an investment with private financial support. The tax consequences depend on that combination. The existence of rent does not make every property cost deductible, and a resulting accounting loss is not automatically available against salary.

The practitioner should calculate the rental result before considering whether any loss can be set against other income. The family concession may also require a donations-tax or employment-benefit enquiry. Records of occupation and use will remain relevant when the property is eventually sold.

Determine what is earned and why expenditure is incurred

The definition of gross income and sections 11(a) and 23(g) of the Income Tax Act 58 of 1962 provide the starting point. Rent received or accrued must be considered for inclusion. Calling a payment “cost recovery” does not conclusively change its nature. The lease and the obligations assumed by each party should explain whether amounts are rent, genuine reimbursements or something else.

For each expense, establish the bona fide trade and its connection with producing income. Below-market rent does not create an automatic statutory ban on every deduction, but it makes the commercial purpose and private element particularly important. Mortgage capital repayments are not the same as interest, improvements are not the same as repairs, and expenditure supporting private occupation may require exclusion or apportionment. South African Revenue Service (SARS): rental-income guidance.

Illustrative example. A parent charges annual rent of R60 000 and incurs R100 000 of property outgoings. The R40 000 cash deficit is not yet a tax loss. The practitioner must remove capital repayments and non-deductible costs, consider private purpose and establish any allowable expenditure. Only the resulting assessed loss enters the ring-fencing enquiry.

Client conversation trigger: Ask family landlords for a written lease, market-rental evidence and a breakdown of property costs before estimating the tax benefit of a loss.

Apply the correct section 20A gateway

Section 20A can restrict an individual’s ability to set a loss from a particular trade against other income. The income gateway changed for years of assessment commencing on or after 1 March 2026. It now refers to the amount at which the 39% marginal rate becomes applicable, rather than the maximum marginal rate. This change is enacted in section 19 of the Taxation Laws Amendment Act 5 of 2026. Amending Act, section 19.

The gateway is only part of the test. Section 20A also addresses the loss history and listed trades. Residential letting is listed unless the specified 80% use by non-relatives for at least half the year is met. A family rental therefore warrants particular attention. The commercial-business escape and its limitations must be tested on evidence, including profitability prospects, scale, expenditure and the loss history. SARS: guide to ring-fencing assessed losses.

Illustrative comparison. An individual with pre-loss taxable income of R900 000 is below the maximum-rate gateway for the 2026 year but above the 39% gateway for the 2027 year. Assuming a listed family-rental trade and a properly established loss, the later year requires a ring-fencing analysis that the earlier income gateway would not have triggered. This illustrates scope, not an automatic tax charge.

Client conversation trigger: Re-screen family-rental clients for the 2027 year; a review limited to taxpayers in the 45% band will miss clients now within section 20A’s gateway.

Examine the concession and the eventual disposal

Donations tax requires analysis under sections 54 to 58 of the Income Tax Act. It should not be dismissed on the ground that no physical asset changed hands: rights can also be relevant property. Equally, a difference between market rent and actual rent is not, without further analysis, a fixed annual donation equal to that difference. Identify the legal benefit granted, gratuitous element and any applicable exemption, including the fact-sensitive maintenance provisions.

Where accommodation is provided by an employer, the Seventh Schedule may instead or additionally require an employment-benefit analysis. The capacity in which the recipient receives the concession matters. Family relationship does not override the employment facts.

Rental use can also affect the primary-residence exclusion under the Eighth Schedule. The outcome depends on ownership, occupation, use and the relevant period. Preserve records now rather than attempting to reconstruct them when the property is sold. The annual income-tax saving should be evaluated alongside that eventual disposal consequence.

Client conversation trigger: Before formalising a family concession, review the lease rights, maintenance context, any employment connection and the property's expected sale position together.

Practitioner action checklist

Explain the after-tax cost of the family arrangement using the allowable deductions, any ring-fenced loss and the other relevant taxes. Keep the lease and evidence of use with that calculation for future reviews and disposal.

Related reading: Allocating rental income between spouses; Allocating rental income after the death of a landlord; Repairs, improvements and recoveries: build the deduction from the work performed.

Frequently asked questions

Can I deduct expenses when renting to family below market rent?

Below-market rent does not create an automatic ban on every deduction, but it makes the commercial purpose and private element particularly important. Each expense needs a connection with producing income.

Can a family rental loss be set off against my salary?

Not automatically. Calculate the rental result first, then apply the correct section 20A gateway to decide whether the loss is ring-fenced.

Are other taxes relevant to a family rental concession?

Yes. The concession may require a donations tax or employment-benefit enquiry, and records of use remain relevant when the property is sold.

Build your expertise: to apply these principles in practice, explore The Tax Faculty’s Professional Certificate in Taxation of Individuals.

About the author

Dr Stiaan Klue is Executive Dean and CEO of The Tax Faculty. He was the founding CEO of the South African Institute of Taxation (SAIT) and is the founding author of Silke on Tax Administration (LexisNexis).

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