Tax: How to calculate capital gains tax when selling your home

Capital Gains Tax (or CGT) is calculated on the profit (income) made when ownership of a capital asset (like a house) is transferred, either in the form of a sale, an inheritance, gifts, or donations.

While the tax applies to any legal persona, including individuals, companies, and trusts, many will avoid having to pay this tax on the sale of their primary home, as it is only payable when an individual makes over R2 million profit.

It is important for all homeowners to understand how Capital Gains works to make sure they remain fully tax compliant and to be prepared in case the need to pay CGT suddenly arises.

CGT is calculated according to the base price you paid for the property. This price is not simply the price you paid for the property, but also includes a number of other costs, like any capital improvements to the property, the real estate agent commissions, the cost of compliance certificates, and other legal fees that must be paid as part of the sales transaction.

For those who have renovated the kitchen or bathrooms, extended the home, or remodelled part of the property, it is suggested keeping record of all the receipts so that it can be used as evidence when submitting the CGT calculations. Keep in mind that a homeowner cannot add the cost of maintaining the home because of everyday wear and tear (e.g., internal, and external painting as well roof repairs, etc.) to the base price.

To help homeowners gain a better understanding of how it works, below is a simplified example on how to calculate CGT on a primary residence:

• Original purchase price = R 2,5 million
• Agent's commission and other applicable fees = R200,000
• Renovations = R400,000
• Selling price = R4,000,000; Base cost: R2,500,000 + R200,000 + R400,000 = R3,100,000 Profit: R4,000,000 - R3,100,000 = R900,000

Because of the primary residence exclusion, the taxable capital gain is zero on the above calculation because the profit is not over R2 million.

If the home had sold for R6,000,000, the profit would be R2,900,000. Because the first R2 million is exempt, CGT would be calculated on the remaining R900,000. CGT would then be calculated at 18%* for individuals (R162,000) or at 36%* (R324,000) for a property purchased through a trust (*according to SARS as at 2023). 

However, there are a few factors that could affect a homeowner's CGT calculation, including: 

• Any income received from running a vacation rental on part of a primary residence or renting out your garden cottage on the primary residence will affect the homeowner's capital gains calculations.
• If the homeowner runs a home office and claims back on office costs, this could "taint" the homeowner's primary residence exclusion. 

When you sell a property that you own and rent out, the primary residence exclusion does not apply and if your capital gain is more than the annual exclusion of R40,000, you will be liable for capital gains tax. These calculations can become complicated, so it is advisable to consult a qualified tax practitioner to help you perform these calculations correctly.

If you are thinking about selling a property, its recommended reaching out to your nearest Real Estate Agent. As area experts, real estate agents are well connected and are often able to recommend a host of local suppliers. Not only could they help you sell the home, but they could also put you in touch with a reliable tax practitioner who can help you perform all the necessary calculations.

Extract From Property  24