Are you selling your primary residence?

There is a common misconception that the sale of a person’s primary residence will never result in capital gains tax being payable; this is incorrect. For most taxpayers the sale of a primary residence will not result in a taxable capital gain; there are, however, circumstances under which it will.

The purchase price of your primary residence is called the ‘base cost’ (there are other costs that can be included in the base cost – these will be discussed in a subsequent article). The ‘base cost’ of the property is very important as it determines whether the taxpayer will have a taxable capital gain.

This is best illustrated by means of examples.

Example A

• Purchase price of primary residence (base cost) – R500 000
• Sale price of primary residence – R800 000
• Capital gain – R300 000 (sale price less base cost)
• Less primary residence exclusion of up to R2 000 000
• Final capital gain – R0

In this example the taxpayer will have a capital gain of R300 000; however, every individual has a R2 million primary residence exclusion i.e. the capital gain will need to be more than R2 million for capital gains tax to be payable. The taxpayer will not (in Example A) be required to pay capital gains tax to Sars upon sale of their primary residence.

Example B

• Purchase price of primary residence (base cost) – R500 000
• Sale price of primary residence – R3 000 000
• Capital gain – R2 500 000 (sale price less base cost)
• Less primary residence exclusion of R2 000 000
• New capital gain – R500 000

In this example the taxpayer has made a large capital gain on the sale of his property (R2 500 000). This is greatly reduced by the primary residence exclusion – resulting in a capital gain of R500 000.

The taxpayer would have to pay tax on this capital gain made on the sale of his primary residence (the amount of capital gains tax payable will always depend on the other income that the taxpayer is earning – every individual taxpayer also has an annual capital gain exclusion of R40 000 which needs to be taken into account in determining the final capital gains tax that will be payable).

It must be noted that in order for a taxpayer to qualify for the primary residence exclusion the property must be used by the taxpayer as their main residence and mainly for domestic purposes. If these requirements are complied with, the possibility of paying capital gains tax on the sale of your primary residence is greatly reduced – it is important that you keep proof of the purchase price of
your property to show Sars if requested.

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