Beware of Capital Gains Tax when you sell

At first glance, Capital Gains Tax (CGT) may seem like yet another thing to worry about when completing a tax return, but it needn’t cause confusion.

Property Blog Articles | Advice | Contractual Matters | Market News

The first thing to note is that CGT is not a separate tax that you need to register for; it is merely an additional item that would be included in your annual tax return, when relevant. So, the question is, when is CGT relevant?

CGT is charged by SARS on gains made upon the disposal of immovable property (most commonly a home, building or piece of land). This means that, if for example, a property were acquired in 2005 for R1m (the base cost) and then sold in 2015 for R2.5m (the proceeds), the total capital gain is R1.5m.

However, in most cases, additional costs are incurred for maintenance or improvements to a property. Therefore, in the above example, if the owner of the property added a swimming pool to the value of R20 000 and converted the garage into a cottage which cost R80 000, these values would be deducted from the overall gain or profit made on the sale of the property.

In addition, a natural person is eligible for an “annual exclusion” to the value of R40 000.

To illustrate the above scenario, the following example can be used:

 R9 000 000 (proceeds of sale)
– R6 000 000 (base cost)
= R3 000 000 (capital gain)

–  R100 000 (improvement)
= R2 900 000

–  R40 000 (annual exclusion – natural persons only)
–  R2 000 000 (primary residence exclusion – natural persons only)
= R860 000 (aggregate capital gain)

It is worth pointing out here though, that because CGT was instituted in South Africa on 1 October 2001, this date is considered the “valuation date” and only gain made on a property from 1 October 2001 is liable for CGT. This means that while any individual selling a property is liable for CGT, the value on which CGT will be calculated will be based on the value of the property as at 1 October 2001 and the gain or profit made from this date up to the date of sale.

It can be seen from the above example that there are also certain exclusions to CGT such as where the property being sold is the primary residence of an individual. In such a situation, any capital gain up to a value of R2m is exempt from CGT. In other words, if a primary residence is sold for R2m or less, the full capital gain is disregarded. However, if this property belongs to a legal entity, such as a company, the exclusion will not apply.

While this is a broad overview of what to expect when it comes to CGT, it is always advisable to seek professional assistance to ensure all regulations are complied with and calculations are done accurately.

‪#‎AskSnymans‬ your property-related legal questions on Facebook.

1835

Recommended for you

Property Blog Articles | Advice | Contractual Matters | Market News
Property Finance

Your bond settlement amount – a brief guide

3193

The sale of a property can often bring with it unforeseen expenses, but this needn’t be the case. To take the mystery out of bond settlement costs, we have put together this brief overview so that sellers can plan appropriately and avoid being caught off guard.

Read More
Property Blog Articles | Advice | Contractual Matters | Market News
Property Finance

Multiple mortgages

4627

Extending finance on a home loan is possible in two ways: accessing funds under security of the already registered bond or, should the security provided under this bond not be sufficient, a second bond can be registered.

Read More
Property Blog Articles | Advice | Contractual Matters | Market News
Property Finance

Approval in principle

6103

Buying a home can be a stressful process, particularly in a competitive market where you need to move quickly or run the risk of losing out on buying the property of your dreams. Being given an ‘approval in principle’ from a financial institution can play a significant role in moving ahead with the property agreement contract.

Read More
Property Blog Articles | Advice | Contractual Matters | Market News
Property Finance

VAT or Transfer Duty?

8671

Buying a property comes with a number of expenses in addition to the basic sale price, one of which will be either VAT or Transfer Duty. Every property transaction will incur one of these two forms of tax, but it is important to understand the difference and know which will be applicable as they have different consequences for the buyer and seller in a transaction.

Read More
Property Blog Articles | Advice | Contractual Matters | Market News
Property Finance

Deposits on new developments

10142

Purchasing a property off plan is often considered a good investment. But before putting down a deposit, it’s important to understand what this means…

Read More

Need more Snymans content?

Sign up for our monthly newsletter.

Beware of Capital Gains Tax when you sell

At first glance, Capital Gains Tax (CGT) may seem like yet another thing to worry about when completing a tax return, but it needn’t cause confusion.

Property Blog Articles | Advice | Contractual Matters | Market News

The first thing to note is that CGT is not a separate tax that you need to register for; it is merely an additional item that would be included in your annual tax return, when relevant. So, the question is, when is CGT relevant?

CGT is charged by SARS on gains made upon the disposal of immovable property (most commonly a home, building or piece of land). This means that, if for example, a property were acquired in 2005 for R1m (the base cost) and then sold in 2015 for R2.5m (the proceeds), the total capital gain is R1.5m.

However, in most cases, additional costs are incurred for maintenance or improvements to a property. Therefore, in the above example, if the owner of the property added a swimming pool to the value of R20 000 and converted the garage into a cottage which cost R80 000, these values would be deducted from the overall gain or profit made on the sale of the property.

In addition, a natural person is eligible for an “annual exclusion” to the value of R40 000.

To illustrate the above scenario, the following example can be used:

 R9 000 000 (proceeds of sale)
– R6 000 000 (base cost)
= R3 000 000 (capital gain)

–  R100 000 (improvement)
= R2 900 000

–  R40 000 (annual exclusion – natural persons only)
–  R2 000 000 (primary residence exclusion – natural persons only)
= R860 000 (aggregate capital gain)

It is worth pointing out here though, that because CGT was instituted in South Africa on 1 October 2001, this date is considered the “valuation date” and only gain made on a property from 1 October 2001 is liable for CGT. This means that while any individual selling a property is liable for CGT, the value on which CGT will be calculated will be based on the value of the property as at 1 October 2001 and the gain or profit made from this date up to the date of sale.

It can be seen from the above example that there are also certain exclusions to CGT such as where the property being sold is the primary residence of an individual. In such a situation, any capital gain up to a value of R2m is exempt from CGT. In other words, if a primary residence is sold for R2m or less, the full capital gain is disregarded. However, if this property belongs to a legal entity, such as a company, the exclusion will not apply.

While this is a broad overview of what to expect when it comes to CGT, it is always advisable to seek professional assistance to ensure all regulations are complied with and calculations are done accurately.

‪#‎AskSnymans‬ your property-related legal questions on Facebook.

1835