YOUR MONEY: Clarity on property capital gains tax

Question:

I read the article by Simon Brown regarding the imposition of capital gains tax (CGT) on the sale of assets. The gist was that CGT is treated as a separate issue to normal income, and that the tax rate is set at a marginal rate of 18%.

This is as noted in an advisory from a well-known conveyancing firm I had read previously.

On submitting my 2023 income tax form, I found that provision is made to record the CGT from a number of sources and that the gains (relating to the sale of residential property in this case) are treated as part of normal income and added to the annual taxable income, raising the tax rate applied in this case to the upper limit.

I used the services of a tax consultant to sort out the various deductions allowed on improvements and additions to the property to arrive at the basic valuation.

I would appreciate it if you could provide some clarity on this.

— Martyn

Answer: 

When selling a property, the first question for tax is if it is your primary residence — in other words, where you live. If yes, then the first R2m of capital gain on your primary residence is exempt from CGT. So for most homeowners, one can assume no CGT is being paid as a R2m gain is a lot. But it must be your primary residence, and naturally you can only have one primary residence at a time.

When you’ve sold your primary residence, there are several costs that can be included in the base cost of the property.

First, the price you actually paid for the property. You can also include the agent’s fees and other fees associated with the cost of transferring the property, such as lawyers’ fees.

You can also add the cost of any improvements to the property — if you added a swimming pool, for example, or a lapa area or maybe even a garden cottage. The cost of all improvements is added to the base price but you must have records, such as invoices, from the contractors who did the work.

This base cost is then subtracted from the selling price to determine the gain and if it’s more than R2m (for a primary residence), then the amount above the R2m is added to your income at a rate of 40%, after your R40,000 annual exclusion.

So, if for example your capital gain is R3m, the first R2m is excluded, leaving a R1m taxable amount. Of that, 40% is added to income, so R400,000 would be added to your income and taxed as such.

Importantly, maintenance costs cannot be added to the base cost. So keeping the roof waterproof or repainting the walls does not count.

— Simon Brown, Just One Lap

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