Capital gains tax on a rental property

A Fin24 user wants to know how much capital gains tax - if any - he will have to pay when selling his buy-to-let property. He writes:

I bought a property in 2003 and lived in the apartment for three years. When we moved in 2006, I started renting the property out and have now decided to sell it.

The purchase price was R311 000 and the selling price R580 000.

Does capital gains tax apply and if so, how is it calculated and how do I declare this to tje SA Revenue Service (Sars)?

READ: Capital gains tax on replacement property

The technical department at the SA Institute of Tax Professionals (Sait) responds:

The disposal of an "asset" for an amount of "proceeds" that exceeds such "base cost" will result in a capital gain, unless a specific exemption or exclusion applies, such as for personal use assets.

Immoveable property does not constitute a "personal use asset" and is specifically excluded in paragraph 53(3) of the eighth schedule to the Income Tax Act.

Where a residence has been used as a "primary residence" for a period of time prior to disposal, the taxpayer will be entitled to utilise the primary residence exclusion in paragraph 45(1)(b) - that is excluding the first R2m capital gain.

As the property was used for non-residential use as well (that is it was rented to someone as a trade) the R2m proceeds exemption in paragraph 45(1)(a) will not apply.

READ: Capital gains tax on two non-rental properties

Furthermore, in terms of paragraph 49, the exemption of R2m capital gain must be apportioned based on the period on or after the capital gains tax (CGT) valuation date of October 2001 for the period of non-residential as a ratio of the total period the asset was held.

For example, in the above example a potential gain of R269 000 may be realised. The total period of ownership of the interest was 12 years (assuming January 2003 to January 2015) and assuming for three years the property was used as a primary residence.

The primary residence exclusion would then be R2m x 3 / 12 = R500 000, sufficient to offset the R269 000 capital gain.

As to disclosure, the disposal of the property would have to be disclosed to Sars in the tax year of disposal and the transaction recorded separately from other capital transactions in the relevant ITR12 personal income tax return for that year.

The Sars Guide on the ITR12 at clause 5.4 discusses how the return must be completed, including answering the question relating to primary residence and inserting the exclusion applicable.

ALSO READ: Capital gains tax exemption on primary property

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