Buying a property is largely a financial and lifestyle-motivated decision and can either take the form of purchasing a home for personal use or potentially building up a property investment portfolio. Whatever route you take, you should always consider the potential tax consequences that go hand in hand with this long-term decision. So here are some key tax considerations as you embark on your property-buying journey.

Capital Gains Tax (CGT)

The annual primary residence exclusion is one of the most useful exclusions from capital gains tax. Essentially, this exclusion provides that when you sell a property you used as your primary residence (i.e., your home), you will become entitled to tax relief on the capital gains realised.

If the proceeds from the sale of your home are less than R2 million, you must disregard any capital gain or loss realised. Alternatively, where the proceeds from the sale of your home exceed R2 million, yet the capital gain or loss does not exceed R2 million, you must similarly disregard that gain or loss.

Importantly, the primary residence exclusion can only be claimed when you sell the property you owned, and if you used the property as your main residence and mainly for domestic purposes.

Where the primary residence exclusion won’t apply

• If you bought your main residence through a company, for example, you won’t be entitled to this exclusion as you don’t own the property, despite using the property as your primary residence.
• If you purchased a house for your parents or other persons, you won’t be able to make use of the primary residence exclusion as you never resided in the house as your primary residence.

Other worthwhile considerations

• 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 part of the capital gain realised on the portion of the property you didn’t rent out.

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 R100,000 will be included in determining your total capital gain for the year. The other R400,000 will be excluded by virtue of the primary residence exclusion.

• There are also further apportionment considerations 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 quite vast and, in many cases, very technical. Therefore, it’s important that one carefully consider the commercial, personal, and tax-related consequences of purchasing any 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.