Tax: How to calculate capital gains tax when selling your home.
Category Property Finance
Capital Gains Tax (or 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 persona, including individuals, companies, and trusts, many will 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 profit.
Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, says that it is important for all homeowners to have an understanding of how Capital Gains works to make sure they remain fully tax 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 remodelled 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 homeowners 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 = R4,000,000; Base cost: R2,500,000 + R200,000 + R400,000 = R3,100,000 Profit: R4,000,000 - R3,100,000 = 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 R6,000,000, the profit would be R2,900,000. 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 homeowner's CGT calculation, including:
- Any income received from running a vacation rental 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 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 advises.
If you are thinking about selling a property, Goslett recommends reaching out to your nearest RE/MAX office. "As area experts, real estate agents are well connected and are often able to recommend a host of local suppliers. Not only could they help you sell the home, but they could also put you in touch with a reliable tax practitioner who can help you perform all the necessary calculations," he says.
Additional information:
As previously stated in this article published on Property24, "Rental income and tax - how does it work?" Craig Hutchison, CEO of Engel & Völkers Southern Africa, explained that rent received from the letting of residential accommodation such as a holiday home, cottage on your property, sub-renting part of your house or a townhouse will all be subject to being taxed. The rental income is added to any other taxable income you receive, such as a monthly salary, explained Hutchison.
Can the taxable income be reduced?
Yes, the taxable income accrued from renting out a property can be reduced as expenses are always incurred.
Expenses that may be deducted from rental income include:
- Bond interest
- Rates and taxes
- Property levies
- Estate agency fees
- Homeowners insurance (excluding household contents insurance)
- Garden services
- Repairs
- Security
Which expenses are not allowed?
It must be noted that only expenses related to the rental of the property may be deducted. Capital and private expenses won't be considered as a deduction by SARS.
"While maintenance and repairs expenses can be passed, improvement costs are a capital expense and will be included in the base cost of the property. When the property is sold, the improvement costs will be an expense that will effectively reduce the capital gain, thus reducing the capital gains tax payable to SARS," said Hutchison.
If expenses exceed rental income
There are times when, for one reason or another, the expenses accrued from leasing a property exceed the income. The loss should then be off-set against other income received by you the owner. When leasing out a property it is always best to consult with an accountant or tax specialist to fully understand what is deductible, how much tax will essentially be paid over the annual lease period, and the like. This will provide a realistic view of your net income.
"Income tax aside, the leasing of a residential property, if managed effectively, is a viable and financially sound way of adding to your monthly income stream. At the same time, you are the owner of an asset that will appreciate in value over time and will pay dividends as the years go by," added Hutchison.
Author: Property24
