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A Fin24 user is confused about the impact of capital gains tax on her two properties which had never been rented out. She writes:
My spouse and I have bought property in 2007 and shortly after that an additional property for my parents to live in. My partner and I are married in community of property and both properties are in our names.
We are planning to emigrate in 2015, however, the question of capital gains tax (CGT) is one of confusion.
We have tried to do research, but not all examples apply to our situation. Technically we have lived in both properties before my parents moved into the second property.
We have never rented it out nor made money in any form from either. In actual fact, both properties where "fixer-uppers". We had taken personal loans to do this.
We are now planning to sell at the beginning of 2015. We are selling our current property first and we expect to get just over R1m. We owe R750 000 on it.
The second property, which we will move to once the first is sold, is valued at around R880 000 and we owe R391 000.
I have been a housewife since 2007 and my spouse is employed full-time. My spouse gets a basic salary of R12 000 per month and the rest is commission based. The two together per month is around R30 000 to R40 000 gross.
- How will the capital gains tax affect us?
- What type of percentage can we expect to pay?
- If both properties have been used as our living residence in the past and will be in future, can we state this to the SA Revenue Service (Sars) and if so, will it help?
- What type of rebate or discount can we qualify for on these properties?
- Is there anything else we can expect to pay in addition to this?
- Who can you recommend I speak to once we start the selling process of the properties to assist us with the Sars submissions?
Pieter Faber, technical executive: tax law & policy at the SA Institute of Tax Professionals (Sait), responds:
How will the capital gains tax affect you?
A capital gain is the difference by which the proceeds on disposal of an asset exceed the allowable costs (that is base cost such as purchase price, transfer fees, sale advertising cost and cost of improvements).
The taxable capital gain to be included in your taxable income is 33.33% of the calculated capital gain, after deduction of the annual exclusion of R30 000 and prior year assessed capital losses.
Where the capital arises from the disposal of a primary residence, a primary residence exclusion applies where any gain or loss is disregarded, namely where the gain or loss is less than R2m or you must disregard the capital gains if the proceeds are less than R2m.
A person can only have a single primary residence at any given time. This exclusion must also be apportioned where the property is jointly owned in relation to the interest held in the primary residence.
For example, if you both own 50% and it is both your primary residence, and then you can disregard the capital gain on the first house, which is your primary residence for the whole period from 2007 till disposal, as the pro rata exclusion is then proceeds less than R1m. Alternatively, the capital gain would be less than R1m for each of you.
Where the house was used as a primary residence, but also used partially for trade or for a partial period for trade (that is home office or leased it) or the person was not ordinarily resident in that residence for the full period of ownership, then the primary residence exclusion must be apportioned.
Where apportionment applies, the R2m proceeds exemption does not apply, only the R2m capital gain exemption. We have assumed that your parents did not pay rent, which would constitute a trade.
In respect of the first house that you and your spouse lived in for the whole period of ownership, by applying the above principles, the sale of the primary residence for just over R1m should not result in capital gains tax.
Once you have sold the first house and stay in the second house, the second house will be your primary residence.
However, as your parents stayed in the house as their primary residence, the primary residence exclusion must be apportioned for that period.
For example, the period of ownership will be 2007 to 2015 and if your parents lived there for seven years and you for one year, then the primary residence exclusion must be apportioned by excluding for such a period of use the periods used by you - that is 1/8 x R2m x 50% (jointly owned) capital gain exemption will apply for each spouse, which is R125 000 per spouse.
You have not indicated the base cost, but I will give an example of such a calculation by using the value of the outstanding bond as the base cost and using an effective tax rate of 15%, assuming you both earn R20 000 per month.
Expected proceeds will be R880 000 less R391 000, resulting in a capital gain of R489 000 or R244 500 per spouse. Of this amount R125 000 must be disregarded and of the remainder R30 000 must be disregarded (that is the annual CGT exclusion) which results in an aggregate gain of R89 500.
Of this amount 33.33% is your taxable gain that will be included in your taxable income for assessment, namely R29 833 per spouse, which at 15%, will result in about R4 475 in actual tax payable per spouse.
What type of percentage can you expect to pay?
Based on the above example your actual cash tax payable is merely 1% of the proceeds accrued by each spouse.
If both properties have been used as your living residence in the past and will be in future can you state this to Sars and if so, will it help?
Paragraph 45(3) of the Eighth Schedule to the Income Tax Act provides that a person can only have one primary residence at any given time which will qualify for the exclusion.
The fact that you used both simultaneously is a question of fact as to whether it will assist. Whether you can be ordinarily resident in two houses at the same time is unclear.
In terms of case law, it is more probable that the house you are mostly resident in would be your ordinary residence as concluded from the facts. Due to the unclear point in law it may be worthwhile not to pursue this point, but to treat the first house as your only place of ordinary residence while you lived in it.
What type of rebate or discount can you qualify for on these properties?
On the first house you are entitled to the full primary residence exclusion of R2m proceeds or R2m of the capital gain as apportioned between the spouses.
Once house one is sold and you live in house two for a period of time, you will have to, on disposal of house 2, apportion the primary residence exclusion as detailed above.
If you have no other capital gains for that year, you are also entitled to utilise your R30 000 annual exclusion per spouse.
Is there anything else we can expect to pay in addition to this?
There are no further capital gains or income tax consequences after the disposal of the houses based on the above facts and assumptions.
Who can we recommend you speak to once we start the selling process of the properties, to assist us with the Sars submissions?
You would be best advised on the tax calculation and compliance requirements of this transaction by a registered tax practitioner as registered with Sars and a recognised controlling body.
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