Home sweet home
What about CGT on the sale of a home? In the case of the disposal by a taxpayer of his or her personal residence there is a major concession made by SARS: with effect from 1 March 2012 the first R2m of any gain made on the disposal of one’s “primary residence” is exempt from CGT (increased from R1.5 million in 2011/12). Only the gain in excess of this amount (if any) will at- tract CGT. For many taxpayers this means that the gain made on such a sale will not attract any tax. However, house prices have increased considerably since 2001 and even in the current economic climate many homeowners who have owned their homes for some years may find themselves one day paying CGT on the sale of their property.
It is important to note that the R2m tax-free con- cession only applies to the disposal of what SARS terms a “primary residence”: this is a property which (a) is owned by a natural person (not a trust, company or close corporation), and (b) the owner or spouse of the owner must ordinarily reside in the home and must also “mainly” use the home for domestic or private residential purposes. Spouses who are married in community of property are deemed to have shared the gains made on disposal of assets, and in their case the R2m exemption will also be shared: they do not each receive the full exemption.
Business is business
While the “primary residence” exemption applies to the sale of most homes, there are a number of situations where the unsuspecting home-owner may not qualify for the exemption, or will other- wise be liable for some CGT on the sale of a home despite being able to claim the exemption. Let’s look at some of these situations….
When assessing the primary residence exemption, “work-from-home” taxpayers should proceed with caution. Firstly, the exemption will not apply at all if a home is used “mainly” as a business (i.e. more than 50% for business in terms of floor space usage) even if the business owner resides in the premises. Furthermore, there are implications even if only a small portion of a disposed home has been used for business purposes, for example where a study in a home is used as an office, or a “granny flat” is used to generate rental income. In these situations, the proportion of the property that is used for non- residential purposes will be excluded from benefiting from the exemption and that portion will attract CGT on disposal of the property.
Most importantly, to qualify for the “primary residence” exemption, the home must be owned by the taxpayer in his or her own right. If the home is owned by the taxpayer’s family trust or a company, the exemption will not apply at all.
This will be the case even if the taxpayer is a beneficiary of the trust and occupies the house as his or her residence. The only exception to this exclusion is where the individual taxpayer owns the home by way of a shareholding in a “share block” company: here the R2m exemption is not forfeited (NOTE: SARS are offering a concession until 31 December 2012 for taxpayers to transfer their homes from trusts or companies into their own names without paying transfer duty, capital gains tax or related taxes – see article below).
The bottom line
A home is often the most valuable asset one ever acquires, and one’s financial planning should accurately take into account the impact of Capital Gains Tax on a home upgrade, downscale on retirement or disposal on or prior to death.