With so many South Africans working from home these days, it is tempting to claim a home office space against business income when it comes to tax deductions.

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But not many realise that doing so can affect the capital gains tax when they sell the home.

Sohail Govender of Just Property outlines what you need to know if you sold your primary residence between March 1, 2021, and February 28, 2022.

To qualify as a primary residence, your home must meet basic requirements as per SARS regulations:

• It must be a structure used as a place of residence by an individual.

• An individual or special trust must own an interest in the residence.

• The individual with an interest in the residence, beneficiary of the trust, spouse of that person or beneficiary must ordinarily reside in the home and use it mainly for domestic purposes as their ordinary residence.

Believe it or not, a yacht, caravan or mobile home can constitute a primary residence if that is where the owners ordinarily reside, and is used for domestic purposes.

If you own and live on a yacht and it is sold you are entitled to the primary residence exclusion.
What is the primary residence exclusion?

When taxpayers sell the home they live in daily, the first R2m of the capital gain (or loss) is excluded when working out capital gains tax.

The remainder of the capital gain will be subject to capital gains tax.

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The primary residence exclusion also applies to the land on which the primary residence is situated, including unconsolidated adjacent land if the following conditions are met:

• The exclusion applies only to a maximum of two hectares.

• The land must be used mainly for domestic or private purposes together with the residence.

•The residence must be disposed of at the same time and to the same person as the land on which it is situated.

All individual taxpayers receive an additional R40 000 capital gains exclusion per year.
How do you work out your Capital Gains Tax?

To work out your net capital gain or loss, of which the first R2m can be excluded, take the proceeds (the amount you sold the property for) and subtract the base cost (the original cost price paid for the property plus improvements).

If the property was purchased before October 1, 2001, consult the relevant rules.

Let’s say Mr A has sold his primary residence for R3m, which he originally purchased for R1.4m on October 1, 2001.

In 2008, he installed a pool at a cost of R100 000. His base cost is R1.4m plus R100 000, which totals R1.5m.

When subtracting the R1.5m base cost from the proceeds of R3m, Mr A’s capital gain is R1.5m.

This falls within the exclusion (limited to the first R2m) and his capital gain/loss is nil.

For assets that were acquired before October 1, 2001 the base cost is equal to the ‘valuation date value’ of the asset, plus any further qualifying costs incurred on or after that date.

How to calculate CGT where properties are in a joint estate/marriage
If a primary residence is held within a joint estate/owned by spouses married in community of property, each spouse is treated as having equal shares.

For example, if a joint estate sold a primary residence for R4m with a base cost of R2m, the capital gain is R2m.

Each spouse will have a capital gain of R1m, less the primary residence exclusion of up to R1m each, meaning that the gain included in taxable income will be nil for each of the parties.

Claiming home office expenditure

If you are working from home, claiming for home office expenditure on your tax return sounds like a great idea.

Think twice when doing so because this could affect your capital gains tax when you are ready to sell.

As Nicci Courtney-Clarke pointed out in her article for The South African Institution of Taxation:

“If the taxpayer worked from home and used part of the house as an office, the Income Tax Act requires the capital gain to be apportioned between primary residence use and business use.

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“This apportionment must take into account the length of time that the home office was used as a portion of the entire period of ownership, as well as the size of the home office compared to the size of the entire property.”

Courtney-Clarke gives the example of a 100m2 home purchased for R1.2m in February 2007.

A 10m2 home office was added in February 2015 at a cost of R300 000.

Remember, apportionment is a percentage calculated based on the square meterage of the portion used for business over a portion of the entire home.

From 2015, the owner claimed 10% of her house running costs as a deduction against her taxable business income till February 2019 when she sold her home for R3.5m.

Her taxable income in 2019 was R500 000. The proceeds from the sale were R3.5m.

Her base cost was R1.2m original purchase price plus R300 000 home office renovations, which totals R1.5m.

Capital gains plus proceeds R3.5m and base cost R1.5m totals R2m.

A portion of the capital gains attributable to the property’s use as a home office (10% for four years out of 12 years): R2m × 4/12 × 10% = R66 666.

A portion of the capital gains attributable to the property’s use as a primary residence: R2m minus R66 666 = R1 933 334.

Less primary residence exclusion: R1 933 334 – R2m = nil. Total capital gains are R66 666. Less is annual capital gains exclusion: R66 666 – R40 000 = R26 666.

“The inclusion rate for capital gains is 40% for individuals. This means that 40% of the gains (R26 666 × 40% = R10 666) is added to the seller’s taxable income and will be taxed at her marginal rate of tax,’’ concluded Courtney-Clarke.

A few interesting questions often asked:

• What if my primary residence was on a 99-year-lease, but I have now sold that lease and made more than R2.5m profit on the sale, will I still be able to apply the exclusion?

Yes, the primary residence exclusion will apply, provided the individual has an interest in the residence. Interest refers to a real right and right of use or occupation.

•What if the primary residence is in a trust or a Pty?

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The primary residence exclusion will only be applicable where the property belongs to an individual or special trust. A Pty or company will not qualify as the company, being a separate legal entity, owns the property.

• We moved to our holiday home on Garden Route during the first lockdown.

I spend the weeknights in our home in Johannesburg and fly back for the weekends.

My wife and children now live in the George home, but I spend most nights in the Johannesburg home.

Should we decide to sell the Johannesburg house, how would capital gains be applied?
The sale of the Johannesburg home would still enjoy the benefit of the primary residence exclusion for CGT purposes. The sale of this home will be included in the individual’s tax return.
Information: Just Property