Capital Gains Tax for property owners

Capital Gains Tax (CGT) forms part of normal income tax payable to the SA Revenue Services (SARS) and is based on the sliding tax tables for individuals, trusts and companies.

The law came into effect in October 2001 and applies to all assets disposed of on or after 1 October 2001, regardless of whether the asset was acquired before, on, or after that date. Only the capital gain or loss attributable to the period on or after 1 October 2001 – the valuation date – must be brought to account for CGT purposes.

If you acquired your property before October 2001, it should have been valued at about that time to establish a base value for capital gains tax purposes. If you did not do this, SARS will use its own formula for calculating the capital gain since that time.

Calculation

CGT applies to taxpayers selling their home or investment property for a profit, which means the proceeds come to more than the base cost. The base cost is calculated as the price you paid for the property (purchase price) plus any amounts spent on renovations or improvements as well as additional costs such as legal and transfer fees, estate agent’s commission and compliance certificates.

Knowing which costs you should take into account when calculating the proceeds and base cost can be complicated. However, the SARS brochure ABC of Capital Gains Tax explains this in detail, and there are many online calculators available to do this for you.

Tax rate

Some potential property investors are reluctant to commit themselves to a property purchase because they believe capital gains on disposal of the property are more severely taxed than other profits.

In fact, capital gains are taxed at a lower effective tax rate than ordinary income. This is because only a portion of the capital gain (currently 40%) is included in taxable income, not the full profit.

For each year of assessment, an annual amount – the annual exclusion – of the sum of a natural person’s capital gains and losses is excluded for CGT purposes – currently R40 000. The annual exclusion increases in the year in which a person dies.

Exclusions

Personal-use assets do not attract CGT. These include personal belongings such as:

• Motor vehicles – including one for which a person receives a car allowance;
• Caravans;
• Artworks;
• Stamp collections;
• Furniture, household appliances, and other assets used mainly – more than 50% – for non-trade purposes.

Assets that attract CGT include:

• Immovable property;
• Financial instruments such as shares;
• Participatory interests in collective investment schemes;
• Cryptocurrency.

Primary residence

The first R2 million of any capital gain or loss on the disposal of your primary residence is disregarded for CGT purposes.

This exclusion means you must make a capital gain of more than R2 million to be subject to CGT. Where the proceeds on disposal of your primary residence does not exceed R2 million, any resulting capital gain will be disregarded.

This rule is subject to specified conditions. For example, no part of the residence should have been used for the purposes of trade.

Non-residents (foreigners) are not accorded an exemption from paying CGT on profits from the sale of their primary residence.

For more details, the Eighth Schedule to the Income Tax Act 58 of 1962 contains most of the CGT provisions that determine a taxable capital gain or an assessed capital loss.

Writer: Sarah-Jane Meyer