CAPE TOWN (August 15) - Before deciding to dispose a property, sellers should take Capital Gains Tax (CGT) into account, as this is one of the most important stages to consider before putting a property up for sale.
South African legislation stipulates that any gains made from a property sold on or after 1 October 2001 will be subject to Capital Gains Tax.
South Africans who bought properties that appreciated in value must do some research on Capital Gains Tax when deciding to sell. The favourable property market has led to a surge in property values across South Africa’s prime suburbs and considerable gains have been made from property investments.
For example, a house purchased for R1 million and generated a R4 million capital gain over a six-year period is now worth R5 million. The first R1,5 million gain on a primary residence is exempt from Capital Gains Tax. The net taxable gain on the property is thus R2,5 Million, of which 25% will be taxable – in this case the taxable amount totals to R625 000. The tax levied will be at the seller’s marginal tax rate, and should that for example be 40%, the CGT payable will be 40% of R625 000, which amounts to R250 000.
The ‘primary residence exemption’ does not apply to secondary properties, therefore the first R1,5 million of the net gain forms part of the capital gain. This rule also applies to South African’s who have properties overseas and non-residents who have property in South Africa.
The basis of working out the taxable amount depends largely on the base cost of the property; the base cost includes the buying price, transfer duty, agent’s commission, advertising costs, broker’s fees and any other cost incurred during improvements on the property. The base cost does not form part of the profits and it will not be deemed as a capital gain.
CGT is only triggered where a profit has been realised, the seller will not have to pay tax if any losses were incurred from the time of purchase. It is also important to note that CGT is payable only on the profits generated by assets after 1 October 2001.
However, that does not mean that if a property was bought before October 2001 it will be CGT free, this tax will be applicable to the profits made after October 2001.
There are a few options available to choose from and work out the best base cost for the seller:
· Work out the deemed value of the property on 1 October 2001. Once this has been done, any justifiable expenses incurred after October 2001 can be added to determine the base cost.
· Time Apportionment method – in order to determine the base cost, the tax man looks at the number of years the property was under the seller’s ownership and uses the period beyond October 2001 to work out a percentage for CGT on the profit made.
· The 20 % rule, this rules deems 20 % of profits received by the seller as base cost, therefore it is important to ensure that allowable costs incurred after 1 October 2001 are deducted before applying the 20 % rule.
As a taxpayer, the seller should consider the option that would be most beneficial for his/her individual circumstances.