Buying a property is a financial and lifestyle-motivated decision. Considering the low interest rates currently available, you may be more tempted to either buy your first home or build up a property investment portfolio. In debating which decision to make, you should always keep the potential tax consequences in mind.
The ABCs of CGT
One of the most useful exclusions of capital gains tax (CGT), is the primary residence exclusion. This entitles you to tax relief on any profits you make from selling your primary residence. The primary residence exclusion will apply if you either
- Sell your home for less than R2 million or
- Realise a capital gain (or loss) of less than R2 million on the sale of your home.
If either of these scenarios apply to the sale of your home, then there will be no CGT on that sale.
CGT Ts and Cs
However, the primary residence exclusion can only be claimed if you own the property you are selling and if you used the property as your main residence.
So for example, if you purchased your home in the name of a company you won’t be entitled to the exclusion even if it’s your primary residence, because you don’t own the property.
And similarly, if you purchase a home for your parents or somebody else, you won’t be able to make use of the exclusion, because it’s not your primary residence.
CGT and leasing
Leasing a part of your home will also negatively impact your primary residence exclusion. In such a case, the primary residence exclusion would only apply to the capital gain realised on the portion of the property that wasn’t leased.
For example, if you were to realise a capital gain of R500,000 when you sell your property, and 20% of your property was used to house tenants, then only R100,000 will be included in determining your total capital gain for the year.
The other R400,000 will be excluded from your total capital gain because it’s your primary residence. There are also further apportionment considerations that need to be made if you don’t physically live in your home for extended periods of time.
Aside from the complex commercial realities that come with buying a property, the tax considerations can be vast and very technical. Therefore, you need to carefully consider the commercial, personal and tax-related consequences of purchasing a property.
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.