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Thursday, November 1, 2007
Do the math

Home owners should take Capital Gains Tax (CGT) into account, as this is one of the most important stages to consider before putting a property up for sale.

South African legislation stipulates that any gains made from a property sold on or after 1st October 2001 will be subject to CGT.
Craig Deats, National Insurance Manager at Mortgage SA says, “South Africans who bought properties that appreciated in value must do some research on this tax before deciding to sell. The favourable market has led to a surge in property values across South Africa’s prime suburbs and considerable gains have been made as a result.”
For example, a house purchased for R1 million, which generated a R4 million capital gain over a six-year period, would attract CGT. The first R1,5 million gain on a primary residence is exempt from the tax, so the net taxable gain on the property would be R2.5 Million, of which 25% would be taxable (that is R625 000). The tax levied will be at the seller’s marginal tax rate. At the top rate of 40% the CGT payable would be R250 000.
The ‘primary residence exemption’ does not apply to secondary properties. This rule also applies to South African’s who have properties overseas and non-residents who have property in South Africa.
The basis of working out the taxable amount depends largely on the base cost of the property; the base cost includes the buying price, transfer duty, agent’s commission, advertising costs, broker’s fees and any other cost incurred such as improvements on the property.
According to Mr Deats, “The base cost does not form part of the profits and would not be deemed as a capital gain.”
CGT is only triggered where a profit has been realised. So the seller would not have to pay tax if any losses were incurred from the time of purchase. It is also important to note that while CGT is payable only on the profits generated by assets after 1st October 2001, it is still payable on properties bought prior to that date – only the relevant profit after that date will have to be included in the CGT calculation.
One option available for a property owned for many years is the ‘Time Apportionment method’. In order to determine the base cost, the tax man looks at the number of years the property was under the seller’s ownership and uses the period beyond October 2001 to work out a percentage for CGT on the profit made.
The ‘20 % rule’ is another option, which deems that 20 % of the profits received by the seller is part of the base cost. Here it is important to ensure that allowable costs incurred after 1st October 2001 are deducted before applying the 20 % rule.
As for any taxpayer, the seller should consider the option that would be most beneficial for his/her individual circumstances.

Copyright © Insurance Times and Investments® Vol:20.10 1st November, 2007
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