THE BASICS OF CAPITAL GAINS TAX FOR HOMEOWNERS
When the selling price of the home is more than the price you initially paid for the home, you will most likely have to pay capital gains on that profit. What is capital gains? Well, simply put, Capital Gains Tax (or CGT) is a tax on the profit (income) you make when you “dispose” of a capital asset like a house. “Dispose” is a technical term for the transfer of ownership which could be in the form of a sale, an inheritance, gifts or donations.
Capital Gains Tax applies to any legal persona, including individuals, companies, and trusts. Of course, like most things in life, there is good news and bad news. The bad news is that CGT will eat into your profits, but the good news is that there are some exemptions or exclusions. We’ll look at these first…
What is excluded from Capital Gains Tax?
All immovable property is subject to CGT. This means that if you sell what they call “personal use items” like your motor car, speed boat, fridge, or washing machine, CGT does not apply and you don’t have to declare that income. However, when it comes to your primary residence (i.e. the house you live in) CGT only kicks in after the first R2 million gain and after you have lived in the property for two years. This means that most people will not have to pay CGT when they sell a home.
How to work out the “base price”
CGT is calculated according to the “base price” you paid for the property. The base price is not simply the price you paid for the property. To work out the base price, there are a number of other costs that you add to the original purchase price. The details are available from the SARS website, and we summarise the most likely costs below:
- Acquisition cost – purchase price
- Fees for professionals involved in the sale of the property, e.g.
- Home inspection and the cost of compliance certificates
- Property surveyor
- Estate agent’s fees, advertising, and other costs
- Transfer fees including stamp duty as well as other legal fees that we must pay as part of the sale transaction
- Improvements to the property (e.g. if you renovated the kitchen or bathrooms, extended the home, or remodelled part of the property, as long as you have receipts for these expenses)
Word to the wise:
You cannot add the cost of maintaining your home because of everyday wear and tear (e.g. internal and external painting as well roof repairs, etc.) to the base price.
Working out the capital gain when you sell your primary residence:
Let’s assume the original purchase price for your home was R 2,5 million, you spent R200,000 on agents commissions and other applicable fees, and you have spent R 400,000 on renovations, and you sold it for R4 million.
The capital gain calculation is:
Proceeds (Sale): R4,000,000
Base cost (Original purchase price less agent’s commission, compliance certificates, and renovations):
R2,500,000 + R200,000 + R400,000 = R3,100,000
Capital gain: R4,000,000 - R3,100,000 = R900,000
Remember the primary residence exclusion?
Because of the primary residence exclusion, the taxable capital gain is zero on the above calculation because the profit is not over R2 million. If the profit had been anything over R2 million, CGT would be calculated at 18% for individuals or at 36% for a property purchased through a trust (as at 2023).
However, there are a few factors that could affect your CGT calculator, including:
- Any income received from running an Airbnb on part of your home or renting out your garden cottage will affect your capital gains calculations
- If you run a home office and you claim some of your office costs, this could “taint” your primary residence exclusion.
Working out the capital gain when you sell your rental property
When you sell a property that you own and rent out, the primary residence exclusion does not apply and if your capital gain is more than the annual exclusion of R40,000, you will be liable for capital gains tax. You would need to do the same calculation as mentioned above but deduct the R40,000 exclusion if applicable.
When performing this calculation, you also have to take into account your total taxable income for the year. This means that any income you might generate from your property must be factored in, somewhat complicating the CGT equation.
Another point to bear in mind: if you’re an equal partner in a property, as would be the case if you are married in community of property, the CGT liability is also shared equally. These calculations can become tricky, so it is advisable to consult a qualified tax practitioner to help you perform these calculations correctly.
If you’re thinking about selling a property, contact your nearest RE/MAX office. As local experts, they might be able to recommend a local tax practitioner who can help you perform all the necessary calculations.
People also ask:
Who is entitled to the capital gains tax annual exclusion?
All taxpayers are entitled to the capital gains annual exclusion.
Is capital gains tax paid by a deceased estate?
No, capital gains tax is not paid by a deceased estate, and if you inherit an asset, the capital gain on that asset only becomes taxable when you sell/dispose of it.
How can I reduce my capital gains tax?
The most practical way to reduce your capital gains tax is to keep accurate records (invoices) of capital improvements to your property. Those amounts can be offset against the gross income from the sale as you calculate the base cost for CGT purposes.