Selling your home for more than you paid for it is usually good news — but before deciding what to do with the proceeds, it is important to understand whether Capital Gains Tax (CGT) could apply.

For many South African homeowners, the good news is that selling your primary residence does not automatically result in a CGT bill.

Here’s a practical guide to understanding how CGT works when selling property in South Africa.

What is Capital Gains Tax?

Capital Gains Tax may apply when you dispose of an asset, such as a property, for more than its base cost.

CGT is not a separate tax. Instead, a portion of your taxable capital gain is included in your taxable income for the relevant tax year and taxed according to the applicable income-tax rules.

At its simplest: Capital Gain = Proceeds from Sale – Base Cost of the Property

But your base cost can include considerably more than simply the price you originally paid for the property.

What can form part of your property’s base cost?

Certain costs associated with buying, improving and selling a property may potentially be included in its base cost.

Depending on your circumstances, these could include:

• The original purchase price
• Transfer duty and qualifying transfer costs
• Certain legal and professional fees
• Estate agent’s commission when selling
• Qualifying improvements or renovations that increased the property’s value

This is why keeping proper records of significant improvements to your property can be important.

There is also an important distinction between capital improvements and ordinary repairs and maintenance. Not every amount spent on a home can automatically be added to its base cost.

Where significant amounts are involved, professional tax advice is recommended.

The R3 million primary residence exclusion

For the current tax year, the primary-residence exclusion has increased to R3 million.

This means that up to R3 million of the capital gain or loss arising from the disposal of a qualifying primary residence may be excluded from CGT.

A simple example

• Suppose you purchased your primary residence for R3 million.
• Over the years, qualifying acquisition costs and improvements increased your base cost to 3.5 million.
• You then sell the property for R6 million.
• Your simplified capital gain would be: R6,000,000 – R3,500,000 = R2,500,000

If the property qualifies fully as your primary residence, the R2.5 million capital gain falls within the R3 million primary-residence exclusion.

In this simplified example, there would therefore be no taxable capital gain arising from the property sale.

What happens if your gain exceeds R3 million?

Let’s assume your qualifying primary residence produces a capital gain of R4 million.

After applying the R3 million primary-residence exclusion, R1 million remains.

For an individual, the current CGT inclusion rate is 40%.

Before considering other applicable exclusions or capital gains and losses, this would mean:

R1,000,000 × 40% = R400,000

The R400,000 is included in your taxable income and taxed at your applicable marginal income-tax rate.

An important distinction is therefore that an individual does not simply pay 40% tax on the capital gain.

The 40% is the portion of the taxable capital gain included in taxable income. The current maximum effective CGT rate for individuals is 18%.

There is also an annual CGT exclusion

Individuals currently have an annual capital gains exclusion of R50,000.

This applies to an individual’s aggregate capital gains and losses for the tax year and is separate from the primary-residence exclusion.

The calculation can become more complicated if you dispose of other assets during the same tax year, as these gains and losses may also need to be taken into account.

What qualifies as a primary residence?

Broadly speaking, the primary-residence relief is intended for a home that you ordinarily live in as your main residence.

An investment property, holiday home or property acquired primarily to generate rental income will not necessarily qualify for the same treatment.

Additional considerations can arise if:

• Part of your home was used for business purposes
• Part or all of the property was rented out
• You did not occupy the property as your primary residence for the entire ownership period
• The property includes land beyond the area qualifying under the primary-residence rules
• The property is owned through a company or trust

These circumstances can materially change the CGT calculation.

What about investment properties?

Investment properties generally do not qualify for the primary-residence exclusion.

For example, suppose you purchased an investment property for R2 million, incurred R300,000 in qualifying costs and improvements, and later sold it for R4 million.

The starting capital gain calculation would broadly be:

R4,000,000 – R2,300,000 = R1,700,000

The relevant CGT rules, annual exclusion, capital gains and losses and inclusion rate would then need to be applied to determine the taxable capital gain.

Companies and trusts are treated differently`

The entity through which a property is owned can have a significant effect on its CGT treatment.

The current maximum effective CGT rates are:

• Individuals and special trusts: 18%
• Companies: 21.6%
• Other trusts: 36%

This is one reason the ownership structure should be carefully considered when acquiring investment property.

Tax is not the only consideration. Estate planning, asset protection, financing, succession planning and the intended use of the property can all influence the appropriate ownership structure.

When is a property considered sold for CGT purposes?

Homeowners should not automatically assume that the CGT event only occurs when the property is eventually registered at the Deeds Office.

The timing of the disposal is linked to the sale agreement and the applicable conditions rather than simply the eventual registration date.

This can be particularly important when a property is sold close to the end of a tax year.

Selling one home and buying another

Another common misconception is that CGT does not apply if you use the proceeds from your existing home to purchase another property.

Buying another home does not, by itself, remove a CGT liability arising from the property you have sold.

The CGT calculation relates to the disposal of your existing property.

Your new property effectively begins its own tax history, with its own acquisition price and qualifying costs.

What happens when a non-resident sells South African property?

Special rules apply when a non-resident sells immovable property in South Africa, and the amount payable exceeds R2 million.

Under Section 35A of the Income Tax Act, the purchaser is generally required to withhold a portion of the amount payable to the non-resident seller and pay it to SARS.

The current withholding rates are:

• 5%where the non-resident seller is an individual
• 10%where the seller is a company
• 15%where the seller is a trust

Where Section 35A applies, the withholding percentage is applied to the relevant amount payable and is not merely calculated on the portion exceeding R2 million.

Importantly, the amount withheld is not necessarily the seller’s final tax liability. It is an advance payment towards the seller’s normal tax liability for the relevant year.

A non-resident seller may apply to SARS for a directive allowing a reduced or even zero amount to be withheld where the circumstances justify it.

This is particularly important for buyers to understand because the withholding obligation rests with the purchaser.

What about inheritance, death and emigration?

CGT does not arise only when you physically sell an asset.

Certain events can result in a deemed disposal for tax purposes.

Death and, in certain circumstances, ceasing to be a South African tax resident can trigger CGT consequences even though the asset has not been sold in the conventional sense.

Inherited assets also have specific rules relating to their base cost and their subsequent disposal by the beneficiary.

These situations can become complex, particularly where estates, trusts, foreign assets or changes in tax residency are involved.

What if you bought the property before 1 October 2001?

South Africa’s CGT system took effect on 1 October 2001, known as the valuation date.

If you acquired a property before this date, CGT is not simply calculated on the entire increase in value from the date you originally purchased it.

Instead, special valuation-date rules are used to determine the gain attributable to the period after 1 October 2001.

Depending on the circumstances, the calculation can involve methods including:

• Market value at 1 October 2001
• Time-apportionment base cost
• A prescribed percentage-of-proceeds method

Properties that have been owned for several decades can therefore require a more specialised CGT calculation.

What happens with jointly owned property?

Joint ownership does not mean that every owner receives a separate R3 million primary-residence exclusion.

The primary-residence exclusion is effectively apportioned between qualifying owners according to their ownership interests.

For example, where two spouses each own 50% of a qualifying primary residence, the gain and applicable primary-residence exclusion would generally be apportioned between them according to their respective interests.

In other words, a jointly owned home does not receive R3 million per owner.

Are any entities exempt from CGT?

Certain persons and entities receive specific CGT exemptions or concessions.

For example, retirement funds are exempt from CGT, while qualifying Public Benefit Organisations (PBOs) may be fully or partially exempt depending on their circumstances and the nature and use of the asset.

This further illustrates why the tax treatment of an asset can differ substantially depending on who or what owns it.

Keep your property records

One of the simplest things homeowners can do is retain good records relating to their property.

Consider keeping:

• Original purchase documentation
• Transfer and legal cost records
• Proof of transfer duty
• Invoices for major renovations and improvements
• Architectural and building costs
• Professional fees
• Estate agent commission records
• Documentation relating to the eventual sale

A renovation completed 10 or 15 years ago may feel irrelevant today, but the supporting documentation could potentially become valuable when calculating your property’s base cost when you eventually sell.

The bottom line

Capital Gains Tax on property is not simply a tax on the difference between what you paid for your home and what you eventually sell it for.

Your property’s base cost, qualifying expenses, whether it was your primary residence, how you used the property, the length of ownership, your ownership structure and even your tax-residency status can all affect the final calculation.

Understanding these factors before you sell can help you avoid unexpected tax consequences and give you a clearer idea of how much of the sale proceeds may be available for your next property purchase.

Selling and buying again? MultiNET can help.

Selling one property often means financing the next.

At MultiNET Home Loans, we help South African homebuyers navigate the home-loan process and submit applications to multiple banks, helping you compare the options available and secure a competitive home-loan solution suited to your circumstances.

Whether you’re buying your first home, moving to a bigger property, downsizing or purchasing an investment property, having an experienced home-loan partner on your side can make the process considerably easier.

Speak to a MultiNET Home Loan Specialist and let us help you get home.

MultiNET Home Loans — More banks. More choice. Better home loan opportunities.

0861 54 54 44 | WA 061 537 8778 | info@multinet.co.za