1. Will the sale of my primary home be subject to CGT?
For the 2018 and 2019 years of assessment the first R2 million of a capital gain or loss on disposal of a primary residence must be disregarded. This concession, known as the primary residence exclusion, means that most individuals will not be subject to CGT on the sale of their primary homes.
Thus, if the primary residence is sold during the 2019 year of assessment for a capital gain of R2,5 million, the first R2 million is excluded and the remaining R500 000 is subject to CGT.
You are also entitled to disregard any capital gain on disposal of your primary residence if the proceeds do not exceed R2 million. In such event you do not need to determine the base cost of the residence. This rule is not available under certain circumstances, for example, when you have not ordinarily resided in the residence throughout the period since 1 October 2001 or have used part of it for trade purposes.
2. What is a primary residence?
A residence must meet certain basic requirements before it can qualify as a primary residence (Paragraph 44 of the Eighth Schedule).
- It must be a structure, including a boat, caravan or mobile home, which 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, or spouse of that person or beneficiary must ordinarily reside in the home and use it mainly for domestic purposes as his or her ordinary residence.
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.
3. I enter into a long-term lease for a building which I then use as my primary residence. I then sell this right for a profit of R2 million. Can I claim the primary residence exclusion?
Yes. In order to have a primary residence an individual or special trust must have “an interest” in a residence. The term “an interest” includes, among other things, a real right and a right of use or occupation. A long-term lease may comprise a real right (for example, a registered lease of at least 10 years). It would in any event comprise a right of use or occupation.
4.(a) Is the primary residence exclusion an unlimited exclusion?
No, certain limits have been placed on the exclusion.
- The exclusion will not apply to any capital gain or loss in excess of R2 million for the 2018 and 2019 years of assessment. To the extent that the gain exceeds R2 million, the excess must be taken into account as a capital gain. For example, if the gain is R2,5 million, R2 million must be disregarded while R500 000 will comprise a capital gain (paragraph 45(1) of the Eighth Schedule).
- You may not claim the primary residence exclusion for more than one residence at a time (paragraph 45(3) of the Eighth Schedule).
- The exclusion will apply only to a capital gain or loss attributable to a maximum of two hectares of land used together with the primary residence for domestic or private purposes. For larger pieces of land or land that is not used for private or domestic purposes the capital gain or loss must be apportioned. The primary residence exclusion will reduce only the qualifying portion of the capital gain or loss (paragraph 46 of the Eighth Schedule).
- The exclusion will not apply to any capital gain or loss in respect of a period on or after the valuation date (1 October 2001) when the person was not ordinarily resident in the primary residence (paragraph 47 of the Eighth Schedule).
- The exclusion will not apply to any capital gain or loss in respect of that part of a primary residence that has been used for the carrying on of a trade after the valuation date (paragraph 49 of the Eighth Schedule).
(b) Will it apply to a residence held through a company or trust?
No, because the owner must be an individual or special trust. However, the estate planning, limited liability, or other considerations that led to the property being placed in a company or trust may outweigh the advantage of the primary residence exclusion.
5. What happens if I dispose of my primary residence in a joint estate, and I have a capital gain in excess of R2 million during the 2019 year of assessment?
The disposal of a primary residence that falls within the joint estate of spouses married in community of property is treated as having been made in equal shares by each spouse and the primary residence exclusion will be apportioned between them .(paragraphs 14 and 45(2) of the Eighth Schedule ).
Example
| Proceeds |
R2 000 000 |
R2 000 000 |
R4 000 000 |
| Less base cost |
R 500 000 |
R 500 000 |
R1 000 000 |
| Gain |
R1 500 000 |
R1 500 000 |
R3 000 000 |
| Less exclusion |
R 1000 000 |
R 1000 000 |
R2 000 000 |
| Capital gain |
R 500 000 |
R 500 000 |
R1 000 000
|
6. What happens if I no longer ordinarily reside in my home because I have moved to a new home and am trying to sell the old one?
Generally a person is not entitled to more than one primary residence at the same time. However, you will be treated as having been ordinarily resident in your primary residence if you were not ordinarily resident during a period not exceeding two years for any of the following reasons (paragraph 48 of the Eighth Schedule):
- At the time the residence was your primary residence it had been offered for sale and vacated due to the acquisition or intended acquisition of a new primary residence
- The residence was being erected on land acquired for that purpose in order to be used as your primary residence.
- The residence had been accidentally rendered uninhabitable (for example, because of a fire).
- Your death (this enables your deceased estate to claim the primary residence exclusion).
A residence is treated as having been used for domestic purposes during any continuous period of absence while it is being let under the following circumstances (paragraph 50 of the Eighth Schedule):
- The residence must not be let for more than five years.
- You, your spouse or a beneficiary of a special trust must have resided in the residence for a continuous period of at least one year before and one year after the period of absence.
- You treated no other residence as a primary residence during your absence.
- You were temporarily absent from the Republic or employed or engaged in carrying on business in the Republic at a location further than 250km from the residence.
7. I work in Johannesburg where I bought a townhouse to stay. My wife and three children still stay in Umtata, my hometown, where I have my main home. Will the sale of my townhouse qualify for the primary residence exclusion when I move back to Umtata?
You will have to choose which of the two residences is to be regarded as your primary residence. If you choose the townhouse then the proceeds from the sale of the townhouse would qualify for the primary residence exclusion.
However, should you later dispose of your house in Umtata, any capital gain or loss on its disposal would be subject to CGT for the period that you stayed in your townhouse. This follows from the point made in the answer to question 4(a) above that a person may not claim a primary residence exclusion for more than one residence at a time (paragraph 45(3) of the Eighth Schedule).
8. I own a flat through shares in a share block company. I reside in the flat when on holiday, and rent it out the rest of the year. What will the CGT implications be if I sell my shares in the share block company?
The definition of “an interest” in paragraph 44 of the Eighth Schedule includes a share owned directly in a share block company. The primary residence exclusion can therefore potentially apply to a capital gain or loss on disposal of such shares if the residence is used as a primary residence.
However, in this case the capital gain or loss made on the sale of the shares cannot be disregarded because the flat will not qualify as a primary residence.
One of the basic requirements for a flat to qualify as a primary residence is that the owner, beneficiary of a special trust, or spouse of the owner or beneficiary must ordinarily reside in the home and must use the home for domestic purposes as his or her ordinary residence.
9. I am married to three wives in terms of customary law. My wives stay in three different homes that I own. Which home is my primary residence for CGT purposes?
Following the coming into force of the Recognition of Customary Marriages Act, 120 of 1998, on 15 November 2000, each of your wives is recognised as a spouse. You will have to choose which of the three residences is to be regarded as your primary residence. You should always bear in mind the point made in the answer to question 4 above that a person may not claim a primary residence exclusion for more than one residence at a time.
10. (a) If a salaried employee owns a house that they live in and own a second property that was let out, are they liable for capital gains tax on the second property which they sold?
(b) The same scenario but assume the taxpayer gives the tenant notice on the second property and then moves into the second property and lives in it. The taxpayer then advertises the second place for sale. Is the taxpayer liable for capital gains tax on the second property when it is sold?
(c) Is there a period that a taxpayer must live in a property for it to be classified as their primary residence?
(a) Yes
(b) Yes, the taxpayer will be liable for capital gains tax for the period that the residence was let. Assume the taxpayer let the property from 1 October of year 1 to 30 September year 6 (five years) and then lived in the residence for another five years until 30 September of year 11 before selling it. The taxpayer will be liable to capital gains tax on half (5/10) of the overall capital gain on the disposal of the residence. The other half of the overall capital gain will qualify for the primary residence exclusion.
(c) There is no minimum period that a person must live in a residence to claim it as a primary residence. However, the taxpayer must be able to convince SARS that the residence is his or her ordinary residence. A word of warning: A taxpayer who buys and sells properties at short intervals runs the risk of being classified as a property trader in which case any profits on disposal will be taxed in full as revenue gains.
11. I bought a property smaller than 2 hectares in Bantry Bay in May 1980 for R98 000. Since then we have lived in the house as our primary residence. Between May 1980 and 1 October 2001 we made some improvements amounting to R152 000. The market value of the property on 1 October 2001 is R3 500 000. Would I be liable for CGT if I sold the property for R5 million on 30 September 2018?
There are three possible methods for determining the gain on this property.
Market value
Proceeds R5 000 000
Less: Market value R3 500 000
Gain R 1 500 000
Time Apportionment Base Cost
Proceeds R5 000 000
Less: Time-apportionment base cost R2 750 000
Gain R2 250 000
20% of Proceeds
Proceeds R5 000 000
Less 20% x proceeds R 1 000 000
Gain R4 000 000
You may adopt any of the three methods illustrated above but the market value method gives the lowest capital gain of R1,5 million.
You would not be liable for capital gains tax on the disposal of the residence because the first R2 million of any gain or loss on disposal of a primary residence is disregarded for capital gains tax purposes. Note that the market value method of determining the base cost will be available to you only if you valued the residence on or before 30 September 2004. The prescribed valuation form (CGT 2L) must be completed and retained in the event of an audit by SARS.
* Original cost + (Proceeds – Original cost) X Years before valuation date
Years before valuation date= 20
Years after valuation date = 18
= 250 000 + [(5 000 000 – 250 000) x 20/(20+18)]
= 250 000 + 2 500 000
= 2 750 000
Note that the number of years before valuation date in the formula above is limited to 20 years when an improvement to the property has been made in more than one year before the valuation date. This limitation compensates for the fact that the formula treats all improvements before valuation date as if they were made at the beginning of the period. Note also that a part of a year is treated as a full year.
SARS has published a time-apportionment calculator (TAB Calculator) on its website to assist taxpayers in determining the time-apportionment base cost of an asset. It is based on an Excel spreadsheet.
12. A couple has lived on a boat that is longer than 10m for a number of years. The boat is their primary, and indeed only residence. Will they be exempt from CGT if they sell the boat or will SARS seek to tax any gain on disposal?
A boat used as a place of residence by an individual is specifically included in the definition of a “residence”, as is a mobile home and a caravan. A boat will therefore qualify for a primary residence exclusion on the same basis as a more conventional residence.
13. Is the primary residence exclusion of R2 million for the 2019 year of assessment subject to apportionment?
The primary residence exclusion is not subject to apportionment when a part of the residence is used for trade purposes or when it is not ordinarily resided in for a part of the period of ownership.
The first step is to calculate the overall capital gain or loss on sale of the residence. Next you must work out what portion of that gain or loss relates to the primary residence. For example, if 10% of the residence was used as a home office, and there was a capital gain of R3 million, then the capital gain attributable to the primary residence is R2,7 million (R3 million x 90%) and the R2 million exclusion is applied in full against this figure. So R700 000 (the portion of the gain not covered by the R2 million exclusion) and R300 000 (the portion of the capital gain which is not in respect of a primary residence) would be subject to CGT. The R2 million exclusion is, however, apportioned when more than one person has an interest in a residence. For example, if husband and wife each own 50% of a residence then they will each be entitled to only R1 million.
14. More than 50% of my home is used for business purposes. Do I qualify for the primary residence exclusion?
No. Under the definition of a “primary residence” in paragraph 44 of the Eighth Schedule, a primary residence must be used mainly for domestic purposes. “Mainly” in this context means more than 50%.
