Capital Gains Tax on Your Primary Residence

Selling your house will get you a large amount of profit and you can exclude a part of this profit from your taxable income.

What is Capital Gains Tax?

Capital Gains tax was introduced in South Africa on the 1st of October 2001, and is the tax amount that will be charged on any profit you make on the sale of any capital property that you own.

Who has to pay Capital Gains Tax?

All South African residents have to pay Capital Gains Tax, as also non South African residents who make a profit from selling capital property located in South Africa.

How does this work when a Residence is being sold?

If the house you are selling is a primary residence, you can exclude up to R1.5 million from the taxable amount of profit that you make when you sell your house. Also only the first 2 hectares of the property can be exempted from tax, the rest of the area will be taxable. If business is conducted in any part of the house, that profits made from selling that part of the house will also be taxable under Capital Gains Tax.

What is a Primary Residence?

A primary residence is a house that is used as an ordinary residence. This means that if business is transacted in any part of the house, different rules will apply while you calculate the Capital Gains Tax on the sale of the house. The house has to be in your name; also, you have to have lived in it and not used it as a vacation home or rent it out to other people. In the United States of America, for example, you have to have lived in the house for a total of twenty-four months within five years before the day you sell the house.

How do You Calculate the Capital Gains Tax on Your Primary Residence?

The tax is calculated on the capital gain, which is the amount of profit that you make when you sell your primary residence. The base cost of the property includes the price you paid for it and the costs for buying and selling the property and extensions to this property. Transfer costs, advertising, VAT and agency fees can be included in the base cost. The base cost is then deduced from the selling price of your primary residence. The tax is paid in the year you sell your house – and is calculated by adding 25% of the capital gain to your income before you calculate your income tax with the current individuals marginal rate.

Only for primary residences is the exemption of R1.5 million made. The sale of your primary residence, if it does not fetch you more than R1.5 million profits and the area of the property in question is less than 2 hectares, is not taxable. This makes your primary residence possibly the largest asset you own in terms of return if you should have to sell it. This is true for most countries in world.

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