Capital Gains Tax on property transactions

This month I thought I would provide some insight into Capital Gains Tax (CGT) as it applies to the sale of property. While there is a R2 million exemption threshold on a primary residence, this does not apply to second properties which are subject to CGT (less the general annual exclusion of R40,000).

CGT is payable by all individuals, trusts and companies to the South African Revenue Service (SARS) when you sell a property that has increased in value since you purchased it. While effective on purchases since October 2001 it applies to any profit gained since this date regardless of the original purchase date.

CGT is not a separate tax. The gains/losses based on the transaction/s must be declared in your annual tax return which means that even if there was a loss on the asset when sold, it still needs to be declared.

Capital or revenue

When declaring a gain or loss on a property, the seller must prove whether the original purchase was capital or revenue in nature. If it was intended to generate a profit, it would be revenue, but if it was as a financial investment, (e.g. second home or rental property) it would be capital and CGT will apply.

Primary versus secondary property

The first R2 million gain on a primary residence is exempt from CGT, but this exclusion does not apply to any portion of capital gains made from parts of the home used for business (e.g. a home office or rental).

The gain on the sale of a secondary property would be subject to CGT, but the general annual exclusion of R40 000 (2019/2020) can be deducted. Only 40 percent of the gain is subject to tax and is then added to your annual earnings in your tax return.

Calculating the profit/loss

To determine the capital gain/loss, you deduct the original cost of the property from the selling price. The original cost, referred to as the "base cost" would include the original price paid, less all costs incurred during the ownership period (e.g. renovations, transfer and duties costs, attorney fees, agent's commission). If these costs where however claimed as expenses in previous tax assessments, it cannot be included in the base cost calculations.

Simple calculation to illustrate

If you sold a primary residence for R4 million with a base cost of R2.9 million (e.g. R2.5m paid and R400,000 spent on renovations), it leaves a gain of R1.1 million which is below the R2m exclusion, hence there will be no CGT applicable.

Using the same scenario, but as a second property (e.g. a rental), the R1.1m would attract CGT, but you would deduct the R40 000, leaving a net of R1.060m. Only 40% of that is taxable, hence the taxable amount would be R424 000. Assuming you also earned R50 000 in rental income, the total would then be R924,000. Assuming that the marginal tax rate of 41% applies, the capital gains tax will be R173 840.

While there is plenty of information available online, it is always advisable to consult a tax professional when it comes to CGT, especially where it involves complex property holdings.

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Source: privateproperty.co.za