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SA Residential property

Steward explains Capital Gains Tax

Following up on comments widely reported in the property press, Lanice Steward, MD of Anne Porter Knight Frank, has said that there are still some potential property investors who are reluctant to commit themselves to a property purchase because they have the idea that the capital gains on property are more severely taxed than other profits.

Spelling out the basic facts on residential property taxation, Steward said that slightly different rules applied to South African residents and foreign property owners. In addition, for local residents a clear distinction is made between primary residential property (that in which the owner lives) and secondary properties (those acquired for investment or holiday purposes). The type of holding vehicle will also influence the tax paid, companies and close corporations being higher taxed than individuals.

Capital Gains Tax for properties, said Steward, became a reality in October 2001. Since then if a property was owned by an individual, 25% of the capital gain since its purchase attracts tax, the 25% being added to his income and charged at the applicable tax rate. As the current marginal income tax rate for individuals is 40% they will in practice pay a maximum of 10% on the capital gain.

One of the common errors made by many property owners is to think that the entire capital gain is taxable, said Steward, however, only 25% of the gain is, in fact, subject to tax.

If the property was the individual’s primary residence, the first R1,5 million capital gain is exempt. Non-residents are not accorded this exemption and also have to pay Capital Gains Tax on 25% of the gain. In all cases the base cost includes the transfer, VAT, legal and agent’s fees. It also includes any improvements and extensions made on the acquisition but does not include the maintenance and insurance costs or the interest on a mortgage bond.

If a home is used for both living and business purposes, the business section does not qualify for primary residence exemption.

If the property was acquired before October 2001, it should have been valued at about that time for Capital Gains Tax purposes. If, however, this was not done the government has an equitable formula for calculating the capital gain since that time.

When the seller is a non-resident and the sale price is above R2 million, the estate agent and the conveyancer by law have to inform the seller in writing (and are held responsible for seeing) that the seller deducts a percentage of the price for payment to the South African Revenue Services and this must be done within 14 days of the transfer. The percentage deductible is 5% for an individual seller, 7,5% for a company and 10% for a trust. This ruling became necessary because previously certain foreigners were taking their profit out of the country without paying the capital gains tax.

Steward repeated also that whilst Capital Gains Tax should not be a deterrent to property investment for rental or simple wealth creation purposes, those going this route should reckon on holding their properties for at least four to five years because short term gains here are highly unlikely since the near-recessionary conditions have set in.