DALL·E

When you dispose of a capital asset for more than you paid for it, there may be tax consequences. This is also known as taxable capital gain. For example, if you bought a car for R100,000, and you sell the same car for R150,000, you’ve made a capital gain of R50,000. This capital gain may be taxable and may be subject to tax in terms of the Income Tax Act, 58 of 1962 (“the Act”).

However, the same doesn’t apply when you make a capital gain from selling your primary residence, as the Act provides an exclusion to ease the burden for homeowners.

The primary residence exclusion reduces the taxable capital gain or loss from the sale of your primary residence. When you sell your primary residence, the first R2 million of any capital gain is exempt from tax.

The conditions

To qualify for the primary residence exclusion, the following conditions must be met:

• The house you are selling must have been your primary residence, not a rental property or a holiday house;
• The exclusion applies only to the capital gain or loss on up to two hectares of land used for domestic or private purposes in conjunction with the primary residence. If the property exceeds two hectares of land and is used for non-domestic and non-private purposes, the capital gain must be apportioned; and
• You must have lived in the home for most of the time you owned it. If the property was rented out, used for business purposes, or not used as your primary residence for a part of the ownership period, a pro-rata portion of the exclusion may apply.

Capital gain or capital loss exceeding R2 million

The exclusion still applies even if the capital gain exceeds R2 million. For example, if you sell your home for R4 million (having bought it for R1 million), your capital gain is R3 million. After applying the R2 million exclusion, only R1 million is subject to capital gains tax.

The primary residence exclusion is an exclusion that applies to both a capital gain and a capital loss. The consequences are the same: If you originally purchased your home for R10 million rand and sell the property five years later for R5 million rand, the same exclusion applies. In that case, you made a R5 million capital loss on the sale of the property. The primary residence exclusion will apply to R2 million of that R5 million. You will therefore include a R3 million capital loss in your tax calculations for that year of assessment.

The primary residence exclusion provides generous tax relief, but it’s important to understand the criteria a property must meet to make use of the exclusion. It’s essential to keep records of when you bought and sold your property, the purchase price and any expenses related to improvements on the property, as these can further reduce your taxable capital gain.

Being tax efficient is an important part of great financial management. In this blog, a group of South African tax experts at AJM Tax share their tips and explanations on tax issues. Learn everything you need to know about tax, from deductions you never knew about to retirement savings and capital gains. The first Tuesday of every month is Tax Tuesday.