With so many South Africans working from home, it’s tempting to claim a home office space against business income when it comes to tax deductions.
But not many realise that doing so can affect their capital gains tax when they sell their home, says Sohail Govender of Just Property who outlines what you need to know if you sold your primary residence between 1 March 2021 and 28 February 2022.
What qualifies as a primary residence?
To qualify as a primary residence, your home must meet basic requirements as per the South African Revenue Services (SARS):
- It must be a structure that is 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 special trust, spouse of that person or beneficiary must ordinarily reside in the home and use it mainly for domestic purposes as their ordinary residence
Govender said that a yacht, caravan or mobile home can constitute a primary residence if that is where the owners ordinarily reside, and it is used for domestic purposes. “If you own and live on a yacht and it’s sold for, say, R5 million, you are entitled to the primary residence exclusion.”
What is Primary Residence Exclusion?
When taxpayers sell the home they live in on a daily basis, the first R2 million of the capital gain (or loss) is excluded when working out capital gains tax.
The primary residence exclusion is an exclusion on the first R2 million of your capital gain. The remainder of the capital gain will be subject to capital gains tax, said Just Property.
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 (CGT)?
To work out your net capital gain or loss, of which the first R2 million 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 any improvements, said Govender.
If the property was purchased before 1 October 2001, consult the relevant rules.
Mr A has sold his primary residence for R3 000 000, which he originally purchased for R1 400 000 on 1 October 2001. In 2008, he installed a pool at a cost of R100,000. His base cost is R1 400 000 + R100,000 = R1 500 000.
Subtracting the R1 500 000 base cost from the proceeds of R3 000 000, Mr A’s capital gain is R1 500 000. This falls within the exclusion (limited to first R2 Million) and his capital gain/loss is nil, said Just Property.
For assets that were acquired before that valuation date (1 October 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 R4 000 000 with a base cost of R2 000 000, the capital gain is R2 000 000.
Each spouse will have a capital gain of R1 000 000, less the primary residence exclusion of up to R1 000 000 each, meaning that the gain included in taxable income will be nil for each of the parties, Just Property said.
Claiming home office expenditure
If you’re someone that works from home, claiming for home office expenditure on your tax return sounds like a great idea. But when doing so, think twice because this could affect your capital gains tax when you’re ready to sell.
Many South Africans have worked from home over the past two years, but few are aware that claiming home office expenditure on their tax return will affect the primary residence exclusion upon the sale of the property.
As Nicci Courtney-Clarke pointed out in her article for The South African Institute 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. 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 R1.2 million 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 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 R3.5 million. Her taxable income in 2019 was R500,000. The proceeds from the sale were R3 500 000.
Her base cost was R1 200 000 original purchase price + R300,000 home-office renovations = R1 500 000.
Capital gains + proceeds R3 500 000 – base cost R1 500 000 = R2 000 000.
- Portion of the capital gains attributable to the property’s use as a home office (10% for 4 years out of 12 years): R2 000 000 × 4/12 × 10% = R66 666.
- Portion of the capital gains attributable to the property’s use as a primary residence: R2 000 000 – R66,666 = R1 933 334.
Less primary residence exclusion: R1 933 334 – R2 000 000 = nil.
Total capital gains: R66 666
Less: 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 (i.e., R26 666 × 40% = R10 666) is added to Isabel’s taxable income and will be taxed at her marginal rate of tax,” said Courtney-Clarke.
A few interesting questions
- What if my primary residence was on a 99-year-lease, but I’ve now sold that lease and made more than R2.5-million 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?
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.