Must I pay capital gains tax if I sell my house?
17 September 2021
“I bought my house, which I’ve always lived in since buying it, for about R1 million in 2000, and on my auditor’s advice had it appraised in October 2001 for R1.1 million. Over the years I had about R200 000 worth of improvements done to the house. I maintained the house well and recently put it up for sale to move to a smaller townhouse. I now received an offer of R3.7 million for the house. However I understand that I might have to pay capital gains tax on the sale, and am worried about how much that may be?”
To answer your questions we’ll need to make one or two assumptions. I accordingly assume that you are a South African citizen and also that the house is your primary residential home. Both these facts are important for capital gains tax.
In effect capital gains tax is income tax that has to be paid on any capital gain made. Capital gains tax came into effect on 1 October 2001, and it is therefore good that you have an appraisal of your property for this date. That will help to determine the base cost of the property.
Income tax is applicable to the disposal (removal, alienation and sale) of assets on or after 1 October 2001, and any capital gain that is realised through such a disposal of assets will be subject to income tax, unless it’s specifically excluded.
With respect to the sale of property, capital gains tax will be imposed on any capital gain realised with regards to property being sold. Part of the capital gain is included in the tax payer’s taxable income for that tax year. In the context of the sale of a house, the capital gain will then be the difference between the yield (the amount gained by the sale of the property) and the base cost (the amount paid when the property was bought.)
As mentioned, the use of a house as the primary home is also important. The Income Tax Act defines a ‘primary home’ as a home –
i) In which a natural person or a special trust holds an interest; and
ii) In which that person or a beneficiary of that special trust, or a spouse of that person or beneficiary usually lived in as his/her main home and which was mainly used for domestic purposes.
In the establishment of the base cost of an asset the Income Tax Act provides the following guidelines and determines that base cost is any cost directly incurred:
- For the acquisition of an asset; Direct costs towards the acquisition and sale of an asset, for example – Paying of a surveyor, legal adviser, bookkeeper etc. for services rendered; Transport costs, transfer dues, or similar tax; andAdvertising costs for the sale or buying of the property.
- Costs for appraisal of the asset to determine the capital gains or losses;
- Improvements of an asset; for example extensions and improvements that are still visible at the time of sale of the property; and
- Tax on added value – where it is raised but not recovered as input tax for purposes of added value.
The inclusion rate for a natural person or special trust is calculated at 33.3% per year during the year of assessment. There are also certain annual exclusions of a natural person or special trust. If the person dies in the year of assessment the annual exclusion is R300,000 and the exclusion for a natural person or special trust per year is R30,000.
Important furthermore is the exclusion of the first R2,000.000 capital gain on a primary home of capital gains tax. Where a part of the primary property is used for business purposes that part of the property will however be subject to capital gains tax. If a second home, holiday home or timeshare is sold for profit, the R2,000,000 exclusion is not applicable because it will then not qualify as a primary home.
So, to determine if you will have to pay any capital gains tax, one will have to do the following calculations:
Base cost of the primary property:
Appraisal on 1 October 2001 R1,100,000.00
Appraisal fee charged by the valuator R4,000.00
Capital gain calculations:
Minus Base Cost (R1,304,000.00)
Minus Primary home exclusion (R2,000,000.00)
Capital gain R396,000.00
Taxable capital gain calculations: R396,000.00
Capital gain R396,000.00
Minus annual exclusion (R30,000.00)
Nett capital gain R366,000.00
Taxable capital gain at 33.3% per year on R366,000.00 – R121,878.00
The above is a basic calculation that indicates that capital gains tax may be payable. Because these calculations can become quite complex, we strongly advise that a tax specialist be consulted to assist you with more detailed calculations, seeing as circumstances can differ substantially from case to case.