The tax implications of selling your home

There is a common misconception that the sale of a person’s primary residence will never result in capital gains tax being payable; this is incorrect. 

For most taxpayers, the sale of a primary residence will not result in a taxable capital gain; there are, however, circumstances under which it will. 

The purchase price of a primary residence is called the ‘base cost’ (there are other expenses that can also form part of the ‘base cost’ – these are dealt with later in this article). 

‘Base cost’ is an important concept as it determines the capital gain that is made. 

The following examples illustrate how capital gains tax (CGT) may become payable on the sale of a primary residence. 

Example A – no CGT payable:

- Purchase price of primary residence (base cost) – R500 000

- Sale price of primary residence – R800 000

- Capital gain – R300 000 (sale price less base cost)

- Less primary residence exclusion of up to R2 000 000 
Final capital gain – R0

In this example the taxpayer will have a capital gain of R300 000; however, every individual has a R2m primary residence exclusion available upon sale of their primary residence. 

This will reduce the capital gain in this example to nil. The taxpayer will not (in Example A) be required to pay CGT to SARS upon the sale of their primary residence. 

Example B – capital gains tax payable:

- Purchase price of primary residence (base cost) – R500 000

- Sale price of primary residence – R3 000 000

- Capital gain – R2 500 000 (sale price less base cost)

- Less primary residence exclusion of R2 000 000

- New capital gain – R500 000

In this example, the taxpayer has made a large capital gain on the sale of his property (R2.5m).  

This is greatly reduced by the primary residence exclusion and results in a capital gain of R500 000 being incurred. 

The taxpayer would have to, in this example, pay CGT upon the sale of his/her primary residence. 

The amount of CGT payable will always depend on the other income that the taxpayer receives; every individual taxpayer also has an annual capital gain exclusion of R40 000 which needs to be considered in determining the final CGT that will be payable.

For a taxpayer to qualify for the primary residence exclusion, the property must be used by the taxpayer as their main residence and mainly for domestic purposes. 

If a portion of the property is used for trade purposes, the exclusion will be apportioned accordingly (the property must be used for domestic purposes for more than 50% of overall use, failing which the exclusion will fall away completely). 

If these requirements are met, the possibility of paying CGT upon the sale of a primary residence is greatly reduced. 

It is important that proof of the purchase price of the property is kept to show SARS upon request. 

Increasing the base cost to reduce the capital gain

There are certain expenses that may be added to the base cost of a primary residence to reduce the capital gain. 

Common examples of these include:

- Transfer costs (including transfer duty);

- Estate agent commission on the sale of the property; and

- Improvements made to the property e.g. installation of a swimming pool.

The following example illustrates the difference that adding these costs to the purchase price of the asset can make:

Example C – reduced CGT:

- Purchase price of primary residence – R500 000

- Plus estate agent commission on sale – R150 000

- Plus cost of improvements – R100 000

- Final base cost – R750 000

- Sale price of primary residence – R3 000 000

- Capital gain – R2 250 000 (sale price less base cost)

- Less primary residence exclusion of R2 000 000

- New capital gain – R250 000

These additions to the ‘base cost’ have reduced the capital gain from R500 000 (Example B) to R250 000 (Example C). 

This reduction will result in a greatly reduced tax liability for the taxpayer.

An understanding of the law pertaining to CGT can greatly reduce any CGT that may be payable upon the sale of a primary residence. 

It is important to keep all necessary invoices that verify the purchase price, cost of improvements, estate agent commission and transfer costs. Failure to do so may result in SARS disallowing these expenses and the capital gain increasing. 

Daniel Baines is a legal adviser and tax consultant at PW Harvey & Co.

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