Fairly regularly every year, says Calum Wedge, the Rawson Property Group’s Financial Director, the group’s franchisees report that the public needs educating on the subject of Capital Gains Tax in relation to residential property.
“It has been found,” says Wedge, “that a small but significant percentage of South Africans shy away from property as an investment because they have a vague idea that it carries a higher Capital Gains Tax than other asset classes. This is, however, definitely not the case.”
There are, says Wedge, two types of residential property ownership: if the owner lives in the property most of the time and does not use too large a section for work purposes, it is classed as his primary residence. On such homes today the first R2 million (US $200,000) of the capital gain is totally tax free in terms of the primary residence exclusion tax claim. This in effect means that a high percentage of South African homes are sold without paying Capital Gains Tax because they change hands roughly every eight to ten years and their sales price is often not high enough to make a capital gain of R2 million (US $200,000).
Should the capital gain on a primary home be over R2 million (US $200,000), it has to be noted that, provided documentary evidence can be produced to show what any improvements carried out actually cost, these can be deducted from the gain.
If a home in South Africa was built or purchased prior to a base date of 1st October 2001, the owner had the option in October 2001 of having it valued by an accredited valuer. If he failed to do this he will have to value the base cost according to the “time-apportionment method”, which in practice has proved to be fair and equitable.
Wedge took as a simple example of how Capital Gains Tax works a home sold recently for R5 million (US $500,000), but bought 12 years earlier for R2 million (US $200,000). Over its lifetime so far it has had R500,000 (US $50,000) worth of improvement work carried out, e.g. a patio, a second garage and a new kitchen, which would be excluded from Capital Gain Tax. This effectively means that the capital gain of the home, if sold today, would be R2,5 million (US $250,000) (R5 million minus the initial value of the home and the cost of upgrading) but after the primary residence exclusion of R2 million (US $200,000), the seller is left with a capital gain of R500,000 (US $50,000). One-third of the taxable gain, i.e. R166,666 (US $16,000), says Wedge, will be included in the individual owner’s income for the year in which the home was sold – and the rate at which this is done could be anything from 18% to 40%, depending into which income tax bracket the owner’s total earnings slot.
“Primary homes, therefore,” says Wedge, “are subject to some very real tax advantages and should always be seriously considered as an investment class.”
On secondary homes the R2 million (US $200,000) exclusion falls away and obviously income from rent is also taxable. However any bond interest, maintenance and repair work, agency commissions and management fees are tax deductible – as are levies should the home be subject to these.
This article “Capital Gains Tax on Most Primary Homes Still Satisfactorily Low” was issued by Rawson Property Group – http://www.rawson.co.za