SELLING PRIMARY RESIDENCE – BEWARE OF CAPITAL GAINS TAX
Capital gains tax these days is getting more relevant as the price of property has increased considerably since 1 October 2001 when capital gains tax was implemented in South Africa.
Should you sell your primary residence (registered in your personal name) and the capital gain exceeds R2 million, it may be beneficial to contact your tax consultant to ensure that you will be left with the highest possible gain after having paid the South African Revenue Services.
To help you calculate:
The capital gain = selling price - the base cost.
Where the Base cost includes original cost + transfer duty + transfer fees + improvements + selling cost
And selling cost includes estate agent’s commission + bond cancellation fee + certificates of compliance (for example electrical, beetle, plumbing, gas and electrical fence compliance certificates), etc.
Improvement cost includes all additions over the years such as alterations, improvements, alarm system, new plants, paving, etc.
In addition, should you decide to put your property on the market and aim for a higher selling price by doing repairs and painting before selling, SARS allow for these costs to be deducted as improvements.
It is therefore important that each homeowner keep a file with proper records of the initial purchase costs as well as all further capital improvements and relevant expenditures
In short: The tax that a Seller will pay after deducting all capital costs plus the R2 million primary residence exclusion is 13.3% of his capital gain(if his other taxable income.
Example 1: Selling property bought after 1 November 2001
Say Person A has an annual taxable income of R680, 000 and more and is at the maximum tax rate of 40%. He bought his primary residence in 2002 for R2 million after 2001 when CGT was implemented, and has registered his property in his personal name. He sells the property 12 years later for R5.5 million. Therefore R5.5 million – R2 million primary residence exclusion = R1.5 million capital gain and a further base cost of R500 000 (agents fees, improvements etc) is subtracted = R1 million capital gain. This amount will be added to his annual tax return and the effective CGT rate will be 13.3% of the R1 million or R133, 000.
Example 2: Selling property bought before 1 November 2001
Person B sold his property that he bought in 1991 (10 years before Capital gains tax started in South Africa on 1 October 2001) for R300, 000. He sold the property on 1 November 2013 (12 years after 2001) for R3 million. CGT is therefore calculated at R3 million – R300, 000 = R2, 700, 000 (X) capital gain and a taxable capital gain of (X) x 12/(10 + 12) years, therefore R1, 472, 727.
Example 3; Selling property that was occupied and let
If a person sells his property after 10 years, where he occupied the property as a primary residence for 7 years and rented another property for 3 years due to work circumstances, then SARS will still give him a R2 million primary residence exclusion after the 10 year period.
However, if we use the same example and he bought another property after 7 years which is close to the first property, he will be able to claim only 70% of his primary residence exemption when selling the first property 10 years later.
It is imperative that you do your capital gains tax calculations carefully and arrive at the proper base costs and deductions when selling your property.
Should you have any further questions in this regard or require tax assistance, contact the Tax Consultant Fanus Jonck (tax@jonck.net, Tel 021-914 7454).