When you sell your primary residence, you qualify for an R2,000,000 capital gains exclusion.

I often get asked, but why I have to pay capital gains, it was my primary residence. Most taxpayers don’t know the criteria in order to qualify for this exclusion.

Here are a few questions I get asked the most that can give you clarity on the primary residence rebate and how it can be utilised to your benefit:

• Who should own the property to get the primary residence rebate?
• If the property is in the name of one or more persons, do I get the full R2,000,000 exclusion?
• How many properties can be seen as primary residences?
• Does your primary residence, which is being leased out, qualify for the rebate?
• You stay in your house and use it as your primary residence. For extra income, you rent out one or two rooms. Will this trade income influence your rebate?
• You work from home and claim home office expenses on your annual tax returns. Do I still get the full R2,000,000 exclusion?
• You move to a new house and struggle to sell the old house. Will this still count as my primary residence?

Now let’s start from the beginning

Capital gains on your primary residence is calculated by deducting the base cost from the proceeds. Base cost meaning the purchase price of your home (if purchased after 1 October 2001) plus the transfer duties and any costs to improve your house. Improvements meaning enhancing the value of the property. An example will be you added a garage that was not there or added a swimming pool. Not repairing the garage or swimming pool. Proceeds meaning the sales price less the cost to get the property sold. This will be for example the agent commission and the clearance certificates needed to sell the house.

The first R40,000 of capital gains per tax year is excluded. After this exclusion, only 40% of the net capital gains gets added to your taxable income and taxed per the applicable tax rates for that tax year.

If you bought a house for R2,500,000 and sell it for R5,000,000 the gains will be R2,500,000. R2,000,000 will be excluded as this was your primary residence (all criteria all fulfilled to qualify for this exclusion) an additional R40,000 will be excluded. 40% Of the net capital gains will now be included in your taxable income and taxed with your other income at the applicable tax rate. For this example, R184,000 capital gains will be taxed.

According to the SARS website:

What is a primary residence?

A residence must meet certain basic requirements before it can qualify as a primary residence (Paragraph 44 of the Eighth Schedule).

• It must be a structure, including a boat, caravan or mobile home, which is used as a place of residence by an individual.
• An individual or special trust must own an interest in the residence.
• The individual with an interest in the residence, beneficiary of the special trust, or spouse of that person or beneficiary must ordinarily reside in the home and use it mainly for domestic purposes as his or her ordinary residence.

The primary residence exclusion also applies to the land on which the primary residence is situated, including unconsolidated adjacent land if the following conditions are met:

• The exclusion applies only to a maximum of two hectares.
• The land must be used mainly for domestic or private purposes together with the residence.
• The residence must be disposed of at the same time and to the same person as the land on which it is situated.

Generally, a person is not entitled to more than one primary residence at the same time. However, you will be treated as having been ordinarily resident in your primary residence if you were not ordinarily resident during a period not exceeding two years for any of the following reasons (paragraph 48 of the Eighth Schedule):

• At the time the residence was your primary residence, it had been offered for sale and vacated due to the acquisition or intended acquisition of a new primary residence
• The residence was being erected on land acquired for that purpose in order to be used as your primary residence.
• The residence had been accidentally rendered uninhabitable (for example, because of a fire).
• Your death (this enables your deceased estate to claim the primary residence exclusion).

A residence is treated as having been used for domestic purposes during any continuous period of absence while it is being let under the following circumstances (paragraph 50 of the Eighth Schedule):

• The residence must not be let for more than five years.
• You, your spouse or a beneficiary of a special trust must have resided in the residence for a continuous period of at least one year before and one year after the period of absence.
• You treated no other residence as a primary residence during your absence.
• You were temporarily absent from the Republic or employed or engaged in carrying on business in the Republic at a location further than 250km from the residence.
• There is no minimum period that a person must live in a residence to claim it as a primary residence. However, the taxpayer must be able to convince SARS that the residence is his or her ordinary residence. A word of warning: A taxpayer who buys and sells properties at short intervals runs the risk of being classified as a property trader in which case any profits on disposal will be taxed in full as revenue gains.

Under the definition of a “primary residence” in paragraph 44 of the Eighth Schedule, a primary residence must be used mainly for domestic purposes. “Mainly” in this context means more than 50%.

The primary residence exclusion is not subject to apportionment when a part of the residence is used for trade purposes or when it is not ordinarily resided in for a part of the period of ownership.

Two separate capital gains calculations are needed. The first calculation will be for the trade part and the second calculation will be for the primary residence part. The R2,000,000 exclusion will be applicable in full on the primary residence capital gains calculation. This might mean that there are capital gains that will be included in your taxable income and will be taxed.

This can be explained with the following example:

Same criteria as the first example but 50% of the house was rented out for additional income. Let’s also assume that this was done from the day you purchased the house up to the day you sold the house. Time apportionment might be necessary if this is only applicable for a certain period.

Calculation 1: Trade portion

Proceeds: 50% of R5,000,000 being R2,500,000

Base cost: 50% of R2,500,000 being R1,250,000

Capital gains = R1,250,000

Calculation 2: Primary residence portion

Proceeds: 50% of R5,000,000 being R2,500,000

Base cost: 50% of R2,500,000 being R1,250,000

Capital gains = R1,250,000

Less primary residence exclusion (R1,250,000 – R1,250,000) = no capital gains

You cannot create a loss with this exclusion, in this example, it will be limited to the gains of R1,250,000.

R1,250,000 from the first calculation less the annual exclusion of R40,000 and 40% of the net gains are R484,000 that will be added to the taxable income and taxed per the rax rates applicable per that tax year.

We all worked from home during the Covid-19 lockdown and some of us still work from home and claim/still claims the home office expenses on our tax returns.

This will also have an impact:

In this scenario, you will also have to do the capital gains tax calculations for the work-from-home portion and the primary residence portion. The work-from-home portion might then have a tax implication.

This can be explained with the following example:

Same criteria as the first example but you work from home. Your home office is 25% of the m². Also, assuming that all criteria are met to qualify for the work-from-home deduction on your tax return. You only worked from home for 5 years and you owned the property and used it as a primary residence for 10 years.

Calculation 1: Home office portion

Proceeds: 25% of R5,000,000 and 50% (5 out of the 10 years) being R625,000

Base cost: 25% of R2,500,000 50% (5 out of the 10 years) being R312,500

Capital gains = R312,500

Calculation 2: Primary residence portion

Proceeds: 75% of R5,000,000 50% (5 out of the 10 years) being R1,875,000

Base cost: 75% of R2,500,000 50% (5 out of the 10 years) being R937.500

Capital gains = R937,500

Less primary residence exclusion (R937,500 – R937,500) = no capital gains

You cannot create a loss with this exclusion, in this scenario, it will be limited to the gains of R937,500.

R312,500 from the first calculation less the annual exclusion of R40,000 and 40% of the net sum will be R109,000 which will be added to the taxable income and taxed per the rax rates applicable per that tax year.

Other standout points:

If you stay with your spouse in his/her house and you sell your property, you will not qualify for this exclusion. You can only view one house as your primary residence.

Lastly, If the property is in the name of one or more persons, then the R2,000,000 exclusion must be split between the owners.

In summary, always remember that any portion or period in that the house was not used as a primary residence will have a capital gains impact and might get taxed.