People often make decisions about property investments without a full understanding of the tax implications. Let’s take a look at 10 common questions (and answers!) about income and capital gains tax that every property owner should know.
1. How will I be taxed when I sell my primary home?
You’ll be taxed on any capital gain in excess of R2 million. The capital gain is the difference between the price you paid for the house (referred to as the base cost) and the sale price. You can increase the base cost and thus lessen the gain by any amounts that you have spent on improving the house. These include expenses like additional security, a swimming pool, added living areas, a new kitchen and light fittings. Expenses incurred while moving (estate agent’s and lawyer’s fees, for example) also increase the base cost. You cannot increase the base cost via maintenance expenses such as painting and repairing the pool.
40% of the gain (above R2 million) will be added to your income tax and taxed at your marginal tax rate. In addition to the R2 million primary home exemption, you can also use the general R40,000 capital gains tax annual exemption to reduce your liability – if you haven’t already used this exemption against the gain on the sale of any other assets.
Please note that the property must be used primarily as your home to be classified as a primary residence. If you work from home and use more than 49% of the space for work, you won’t be able to use the R2 million exemption when you sell.
2. How will I be taxed when I sell my holiday home?
You’ll be taxed in much the same manner, but you will not be entitled to the R2 million ‘primary residence’ capital gains tax exemption. Selling a holiday home can be a costly exercise.
3. What happens if I retire and move from my primary home to my holiday home?
Your holiday home becomes your primary residence, and you’ll be entitled to the R 2 million primary residence exclusion if you sell the home. There’s no minimum period that a person must live in a home to claim it as a primary residence. If you do need to sell within a short period, you may need to use certain documentation to convince SARS that the holiday home is your primary residence.
4. What happens when I sell if I let my primary residence out for periods of time?
If your property has been used as both your primary home and as an investment property, the capital gain will need to be apportioned based on the time the property was used for each purpose. The primary residence exclusion may only be set off against the portion of the gain relating to the primary residence period.
5. How will I be taxed if I sublet part of my house?
First, let’s look at the income tax implications. When you sublet your home, the rental income is added to any other income you earned and taxed at your marginal tax rate. You can only deduct the running costs of your house that apply to the rented portion of the property.
Moving on to CGT, when you sell the house, the primary residence exclusion may only be set off against the portion of the capital gain relating to the part of the property that you used as your home.
6. What deductions can I claim against my rental income from my investment property?
You can deduct any expenses that are required to rent the property. These include property rates, insurance, maintenance, cleaning, WiFi, and security. You cannot deduct costs related to improving the property as these will assist to increase the base cost and lessen your capital gains tax liability when you sell.
7. Can I deduct the mortgage payments on my investment property?
You can only deduct the interest portion of the monthly mortgage payments.
8. What are the tax implications if a home is sold by a couple married in community of property?
The sale of a primary residence that falls within the joint estate of spouses married in community of property is treated as having been made in equal shares by each, and the primary residence exclusion is apportioned between them. Both spouses qualify for the full R40,000 annual exclusion.
9. I co-own my investment property. How do I treat the rental income and capital gain for tax purposes?
You and your co-owners will each be liable for income tax on your ownership share of the net rental income earned. Your share in the property will also determine your capital gains tax liability when you sell.
10. I own property overseas. Do I need to declare the rental income I receive on this and the capital gain when I sell this?
As a South African resident, you are taxed on your worldwide income, so it is essential that you declare this rental income. The taxable capital gain arising on the sale of the property must also be included in your taxable income in the year the property is sold.
Tax planning is one of the essential components of financial planning, and you can’t leave anything to chance when buying or selling property. Do remember that different rules apply when a property is in the name of a company or trust, or if you’re not a South African resident. If in any doubt, email me at [email protected] to ensure that your calculations are correct. You can never be too careful.