Capital Gains Tax (CGT) is calculated on the profit (income) made when ownership of a capital asset (like a house) is transferred, either in the form of a sale, an inheritance, gifts, or donations. While the tax applies to any legal person, including individuals, companies, and trusts, many avoid having to pay this tax on the sale of their primary home as it is only payable when an individual makes over R2 million in profit.
According to Adrian Goslett, Regional Director, and CEO of RE/MAX of Southern Africa, it is important for all homeowners to understand how Capital Gains Tax works to make sure that they remain fully compliant and to be prepared in case the need to pay CGT suddenly arises.
“CGT is calculated according to the base price you paid for the property,” he explains. “This price is not simply the price you paid for the property, but also includes a number of other costs, like any capital improvements to the property, the real estate agent commissions, the cost of compliance certificates, and other legal fees that must be paid as part of the sales transaction.”
For those who have renovated the kitchen or bathrooms, extended the home, or remodeled part of the property, Goslett suggests keeping record of all the receipts so that it can be used as evidence when submitting the CGT calculations.
“Keep in mind that a homeowner cannot add the cost of maintaining the home because of everyday wear and tear (e.g., internal and external painting as well roof repairs, etc.) to the base price,” he points out.
To help property owners gain a better understanding of how it works, below is a simplified example on how to calculate CGT on a primary residence:
Original purchase price – R 2.5 million
Agent’s commission and other applicable fees – R200 000
Renovations – R400 000
Selling price – R4 million
Base cost: R2.5 million + R200 000 + R400 000 = R3.1 million
Profit: R4 million – R3.1 million = R900 000
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 home had sold for R6 million, the profit would be R2.9 million. Because the first R2 million is exempt, CGT would be calculated on the remaining R900 000. CGT would then be calculated at 18%* for individuals (R162,000) or at 36%* (R324 000) for a property purchased through a trust (*according to SARS as at 2023).
However, there are a few factors that could affect a property owner’s CGT calculation, including:
- Any income received from running an Airbnb on part of a primary residence or renting out your garden cottage on the primary residence will affect the homeowner’s capital gains calculations.
- If the homeowner/property owner runs a home office and claims back on office costs, this could ‘taint’ the homeowner’s primary residence exclusion.
“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. These calculations can become complicated, so it is advisable to consult a qualified tax practitioner to help you perform these calculations correctly,” Goslett concludes.