Here is what you need to know…the capital gain realised on the sale of residential property is subject to capital gains tax (“CGT”).
CGT is not a separate tax but forms part of income tax. The capital gain you realise on the sale of your property is included in your taxable income at a rate of 40% (and 80% for companies). The capital gain arises when you sell your property for proceeds (the selling price) that exceeds the base cost. In contrast, a capital loss occurs when you sell your property for proceeds that are less than the base cost.
The base cost of your property is equal to the sum of:
- The purchase price of the property;
- All costs directly related to the acquiring or selling property, such as:
- Surveyor fees, valuation costs, agent fees or conveyancer fees;
- Transfer costs (including the cost of obtaining a certificate of compliance for electrical, plumbing, and gas, but excluding any cost for repairs necessitated by such an inspection);
- Transfer duty paid when you initially acquired the property;
- Advertising costs to find a buyer; and
- Costs incurred for improvements (as opposed to repairs) made to the property, specifically an improvement to or enhancement of the value of your property
But excluding any borrowing costs (including interest, bond registration costs and cancellation costs); and costs related to repairs, maintenance, insurance, rates and taxes or similar expenditure.
Individual taxpayers are entitled to an annual exclusion of R40 000, which means that if you realise capital gains of less than R40 000, you will not pay CGT. However, the gains realised should still be declared in your income tax return, and SARS should automatically exclude it from your taxable income.
Special rules apply when you sell your primary residence, being the home that you ordinarily reside in and use mainly for domestic purposes. The primary residence exclusion allows for R2 million exclusion. This means that the first R2 million capital gain realised on the sale of your primary residence is exempt, and the balance (if any) is taxed.
However, if part of your home was used as a home office, that part is considered “tainted”, and the primary residence exclusion will not apply to the tainted portion of the capital gain realised. The primary residence exclusion will also not apply when you sell your holiday home or a property used for rental purposes.
Finally, if you jointly own the property with a spouse or partner, you need to indicate this with an “X” in the appropriate box and declare the full proceeds and base cost. SARS will split the proceeds and costs and allocate 50% to each party.