If I Sell My House Will It Attract Capital Gains Tax (CGT)?

Understanding exactly how Capital Gains Tax (CGT) works can be tricky if you don’t understand finance jargon like “realised assets”. Do you need to be worried about CGT? In this blog post we are going to demystify CGT and focus on the one big question most South Africans will be worried about.

Do I pay any CGT if I sell my house?

Before we answer that question, let’s touch on this quickly:

Capital Gains Tax (CGT) has been around for a while. It was first introduced in South Africa back in 2001 (1^st October 2001 to be exact). In many overseas countries the tax has been around for a few decades already, so we guess it was just a matter of time before our Government decided to implement it here 🙂

What is CGT?

In a nutshell CGT is a wealth tax aimed at taxing the gains of people making money from the sale of their investments. The tax applies to any disposal of an asset on or after the 01-10-2001.

Ok, so what does that mean in plain English.

It means that whenever you sell off an asset (like a 2nd property or cash in an investment) any money you might have made (gain) or any loss you suffered is subject to CGT unless it’s excluded by specific provisions in the Income Tax Act.

A base cost of the asset is established (that would be the value of the asset as of the 01-10-2001) and any gains made after that are taxed.

In this blog post we are going to focus specifically on the sale of your house. For most South Africans this is the biggest investment they will make in their lives, and it makes sense to investigate if the sale of a house triggers CGT.

Do you own a house?

The good news is that most primary residences will not be subject to CGT because the first R2 million of any capital gain or loss on the sale is disregarded for CGT purposes.

That means if you bought your house after 01-10-2001 for R500,000 and sold it today for R2 million, your gain would be R1,500 000 and wouldn’t be subject to CGT because it falls under the R2 million allowance.

What is the definition of a “primary residence”? That’s a good question.

Your home won’t qualify as a primary residence unless:

• it is owned by a natural person or a special trust (not another type of trust, company or close corporation)
• the owner or spouse of the owner must ordinarily reside in the home as his or her main residence and must use the home mainly for domestic purposes.

No confusion around those conditions, right? You need to own your home and you need to stay in it.

When will the sale of a primary residence be subject to CGT?

• If the capital gain on the sale of your primary residence exceeds R2 million, the portion of the capital gain that exceeds R2 million will be subject to CGT. So if your gain was R2,4 million, R400K would be subject to 40% or R160,000 – this would be included as part of your taxable income.
• The portion of your property that exceeds two hectares
• The period in which you didn’t live in your house as the main resident.
• If you use your house for business purposes

Let’s wrap this up with a quick example:

You own a house and the base evaluation of that house was R1,000 000 on the 01-10-2001 when CGT was introduced. In 2009 you installed a swimming pool to the value of R100,000. You sold the house on the 21-02-2018 for R3,200, 000.

Is any CGT applicable?

Let’s have a look at the calculation:

Value of house:                R1,000 000 (as of 01-10-2001)

Improvements:                 R100,000 (the swimming pool you added in 2009)

Base cost:                        R1, 100,000

Capital gain is determined as follows:

Proceeds:                            R3,200 000 (this is what you sold the house for)

Less

Base cost                             R1,100,000 (calculation above)

Gain                                     R2,100 000

Less

PR Exclusion                   R2,000 000 (this is the primary residence exclusion discussed above)

Capital Gain                    R100,000

40% of your R100,000 capital gain would form part of your taxable income and taxed at your marginal rate in the year of assessment.

Until next time.

The Wise About Life Team