Understand Capital Gains Tax

PUBLISHED 19 OCT 2018   

When disposing a property clients often are concerned about the amount of capital gains tax they might be liable for. The best idea will be to ask a tax consultant to get first hand advice and to help understand when capital tax is applicable. There is currently a R 2mill capital gains exclusion on the disposal of a primary residence. This means if the capital gain that you have made on your property is less than R 2 mill, you will not pay capital gains tax on the disposal. However, the purchase price and sales price of your primary residence should still be listed on your tax return in the year that you disposed of that property.

If your capital gain is more than R 2 mill, you will have to pay capital gains tax on the disposal of your primary residence, and the discussion below may assist you in reducing your capital gains tax in such circumstances.

If you have an investment property such as a holiday home that you dispose of, you also need to determine whether there will be any capital gains tax payable as these properties are not subject to the primary residence exclusion.

The basic method of calculating a capital gain is to establish the difference between the cost of acquiring the property or the purchase price and the proceeds from the sale price of the property. There are, however, ways you can legitimately decrease the capital gain, whether on a second property or primary residence. Improvements to the property can improve the base cost, resulting in a reduction in the capital gain made.

For example if you live in a sectional-title property and the body corporate raises a special levy to make improvements to the common property, the special levy you have paid may be used to reduce the capital gain you have made on the property when you sell it. 

In order for these cost to reduce your capital gain, the improvements, must still be on hand at the time you dispose of the property.

In the below example you can see how security expenditure is used the reduce your capital gains tax.

Scenario 1 - capital gain without using security expenses

  • purchase price of investment property (base cost): R 800 000
  • selling price of investment  property: R 1 000 000
  • capital gain: R 200 000
  • capital gains tax (this will depend on your tax rate and circumstances): R 36 000

Scenario 2 - capital gain utilising security expenses

  • purchase price of the investment property: R 800 000
  • security expenditure (electric fencing and alarms): R 50 000
  • new base cost: R 850 000
  • selling price of investment property : R 1 000 000
  • capital gain: R 150 000
  • capital gains tax (this will depend on your tax rate and circumstances): R 27 000

In other words, by taking into consideration certain security expenses when calculating the capital gain, the person in this example will pay R 9 000 less tax on the disposal of the property.

This information was copied from the Sunday Times and published by the author Daniel Baines of "How to get a SARS refund".