Whether you’re looking to buy a property to make it your home or to let, it’s important to understand the relevant tax rules as it can impact your investment returns.

In this month’s blog, we’re taking a closer look at those rules to empower the property moguls amongst us.

For the purpose of this blog, let’s assume the following:

Property A: Your primary residence

• In 2002, you bought a house for a total cost of R1.25 million. This includes what you paid for the property, all legal fees and taxes incurred in the process. You moved in and made it your home.
• You incurred expenses to the value of R750,000 to enhance the value of the property. (For example, you built a swimming pool, added additional rooms etc.)
• You incurred expenses to the value of R150,000 to maintain the value of the property. (For example, the walls were repainted, broken gutters were fixed etc).
• During the 2018 tax year, you sold this property for R3.75 million.

Property B: Buy-to-let property

• In 2002, you bought an apartment as a buy-to-let property for a total cost of R750,000. This includes what you paid for the apartment, all legal fees and taxes incurred in the process.
• You incurred expenses to the value of R55,000 to enhance the value of the property, and ultimately, to improve your income earning capacity. (For example, you split the main bedroom into two single rooms.)
• You incurred expenses to the value of R150,000 to maintain the value of the property. (For example, the walls were repainted, plumbing maintenance costs etc.)
• During the 2018 tax year, you sold this property for R2.75 million.

Tax Consequences

Property A: Your primary residence

• The proceeds (i.e. sale price) of the property is R3.75 million.
• The base cost is R2 million. This is made up of the original cost (R1.25 million) and improvement costs (R750,000). As a general rule, expenses relating to improvements can be added to your base cost, but expenses relating to repairs don’t qualify.
• As a result, the maintenance costs incurred (R150,000) cannot be added to the base cost and therefore, cannot be deducted for tax purposes.

SARS grants homeowners a Primary Residence Exclusion. Should the capital gain on the primary residence property be less than R2 million (first exclusion), or, should the proceeds on selling the property be less than R2 million (second exclusion), no capital gains tax will be payable on the property.

When we consider Property A, the second exclusion will not apply as the proceeds are more than R2 million. The total capital gain on the property is R1.75 million (R3.75 million less R2 million), and therefore, the first exclusion will apply and in this case o tax is payable as it is below the R2million threshold. Please refer to our blog on capital gains tax for other matters that need to be taken into account.

There are also specific tax rules that apply when:

• The property is owned together
• The property is not mainly used as a home (i.e. you have a home office and claim certain tax allowances)
• The property was initially acquired to serve as a primary residence, but was later leased out to a tenant.

Property B: Buy-to-let property

• The proceeds (i.e. selling price) of the property is R2.75 million.
• The base cost is R805,000. This is made up of the original cost (R750,000) and improvement costs (R55,000).
• The maintenance costs (R150,000) is not included in the base cost. However, because the property is used to earn income the R150,000 can be deducted for tax purposes.

The Primary Residence Exclusion does not apply to buy-to-let properties.

And let’s take a look at how much tax you’ll be paying when you sell your buy-to-let property:

The capital gain on this property is R1 945 000 (R2.75 million less the base cost of R805,000). If you apply the R40,000 annual exclusion rate SARS provides and the 40% inclusion rate, you would be taxed on R762,000. If we assume you have a tax rate of 31% the actual tax paid will be R236,220.

It’s also important to note that you will be taxed on the income received from leasing out this property.

Being tax efficient is an important part of great financial management. In this blog, a group of South African tax experts 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. Don’t miss it!