The average property investor is confronted with mounting challenges in the establishment and expansion of residential property portfolios. The investor’s struggle to procure finance has been exacerbated by the introduction of additional restrictions by virtue of the National Credit Act 34 of 2005 (“Credit Act”), combined with the banks’ collective recurring memory of economic collapse.
Notwithstanding the unfavourable credit environment, a number of innovative mechanisms to establish and expand the investor’s portfolio are present. One interesting opportunity lies in the application of the provisions of Chapter II of the Alienation of Land Act 68 (“the Act”), preceded by a thorough analysis and planning of the investor’s estate and structures.
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Estate Planning should be aimed at the establishment, maintenance and sustained development of the investor’s estate and structures to reduce tax while increasing the property’s liquidity and disposable income.
Chapter II of the Act provides for the sale of land where the purchaser pays the purchase price to the seller in more than two installments over a period exceeding one year. “Land” refers to any land currently in use or intending to be used mainly for residential purposes, including sectional title units but excluding agricultural land. The seller retains ownership of the property until payment of the final installment. The contract between the seller and purchaser is recorded against the title deed in the deeds office.
This structure is of paramount importance, in the present economic environment, in the instance where the seller is willing to dispose of the property due to an inability to afford the bond repayments, levy or rates & taxes, to the potential peril of his credit record.
The purchaser, in terms of the provisions of the Act, will therefore be liable for the installment, levy (Sectional Title), rates & taxes and maintenance of the property from the date of their occupation. In return, the purchaser is entitled to the use and enjoyment of the property as well as any income generated.
The benefits to the seller include avoidance of legal process and the sale of his property on public auction. The seller regularly remains liable to the bank when the property is sold for an amount less than the outstanding capital on the bond and protection of his credit record, by evading judgment against him.
The purchaser, in his capacity as bona fide property investor, benefits significantly from this innovative application of the provisions of the Act. He is able to establish or expand his residential property portfolio without the necessity of applying for bond finance.
Regard should be had to proper structuring of the transaction, in particular with regard to the purchaser’s investment structures, to limit tax exposure and application of the provisions of the Credit Act to the transaction.