Capital Gains Tax

Whenever a house or any other property is sold, the seller makes a considerable amount of profit. The profit made is subjected to tax but a large part of it can be excused from the seller’s taxable income.

What does Capital Gains Tax means?

Capital Gains Tax is the tax paid by an individual on the profit from selling any capital property. It was introduced to South Africa not too long ago in October 2001.

Who has to pay Capital Gains Tax?

Everyone gets to pay the tax. As long as the seller is a resident of the country, he pays the capital gain tax. Even if he is a non South African resident, so far the property is located in the country, the profit is taxable.

How does the Capital Gain Tax works when a Property is sold?

As high as R 1.5 million can usually be excluded from the property owner’s taxable income made on the sale of the house if the property is the primary residence. For the sale of land, just the first two hectares is excluded from the calculation of tax- the remaining area of land is taxed. Also, any profit made from selling or doing business on any part of the house is also subjected to the Capital Gain tax.

So What exactly is a Primary Residence?

A primary residence refers to a house that is meant and used solely for residential purpose. What this means is, if business were to be conducted on any part or area of the building, then a separate rule will be applied in calculating the capital gain tax. Also, you must have stayed in it as your residence, and not for vacation, for a period of time. It must be in your name and it doesn’t count as a primary residence if you have rented it out. Different countries have their own additional criteria. For instance in USA, the seller would have resided in the home for at least twenty four months over the last five years before it was sold.

How is the Capital Gains Tax calculated on a Primary Residence?

Capital Gain Tax, as the name implies, is calculated on the capital gain made on the property. Capital Gain is the profit that the property owner makes when his primary house is sold. It is the selling price of the property less its base price. The selling price is the amount collected from the buyer for the purchase of the house. On the other hand, the base price is the amount paid to get the property. This includes the actual cost of the property and all other costs spent on it. Also, the advertising cost, VAT and transfer rates are also included in it. This tax is payable the same year the property is sold. How this happens is, twenty five percent of the capital gain is added to the seller’s income and the income tax is calculated normally.

But what happens if the property’s value is not up to R 1.5 million or the land is less than 2 hectares? The answer is simple. No tax is paid on it. Also, the amount deduction only applies to primary residences and not to business.