Although it has now been applied since October 2001 many South Africans, still have unfounded fears and misconceptions about the way in which capital gains tax (CGT) impacts on property transactions – and this can lead to their shunning property investments.

“The first misconception is that it applies to all residential property sales. In reality, on the owner’s primary residence any capital gain (i.e. profit) up to R1,5m is excluded from tax,” says Lanice Steward, MD of Anne Porter Knight Frank (APKF).

The primary residence, Steward explained, is the one in which the owner spends most of his or her time – it is not necessarily the largest home in their portfolio.

The land on which the home is built has to be no larger than two hectares. A primary residence can be owned through a special trust without affecting the tax situation.

If the home is registered in a company, close corporation (CC) or an ordinary trust more stringent taxation rules will apply. The R1,5m tax exemption is, however, not granted to non-residents selling property in SA.

It has to be pointed out, added Steward, that if, as is increasingly the case today, a portion of the home has been used for business purposes, that part of the property does not form part of the R1,5m extension sum.

Another common misconception is that under normal conditions CGT is onerous. In fact, it is applied only to 25% of the capital gain, not, as many believe, to the entire profit.

“Supposing, therefore, a house bought for R2m has increased in value by R6m and is now sold at R8m, the first R1,5m of the R6m profit is exempt from tax. On the remaining R4,5m only 25%, i.e. R1,25m is taxable. This is taxed at the marginal rate which in SA cannot exceed 40%, i.e. R450k in this case.”

What many home sellers fail to appreciate, said Steward, is that if a careful record is kept of all improvements and additions carried out at the owner’s expense on the home, these, too, can form part of the tax exclusion. However, money spent on maintenance, e.g. painting, waterproofing or replacing gutters, is not tax deductible. “To qualify for these tax rebates, she said, it is essential that the receipts for sums paid should be available for the Receiver to check, and before and after photographs can be a big help.”

The cost of disposing of the property, agents’ fees and valuation costs can also form part of the tax exclusion sum.

The CGT rate for companies or close corporations (CC’s) is higher – 28%. These holding vehicles pay 14% of the capital gain in tax. Ordinary trusts, with an income tax at the maximum rate of 40%, will pay 20% of the capital gain.

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