Renting out your home and the effect on capital gains tax




Our Helpdesk receives lots of questions from home sellers who rented out their primary residence for some of the time that they owned it. For example, they may have lived in it for ten years, and then moved to a different city for a job and rented it out for two years, before selling it. Will this impact their capital gains tax? How do they reflect the details of their home sale correctly in their tax return, given that it was not their primary residence for the entire duration of ownership?

Let’s start off by explaining what Capital Gains Tax is, and how it comes about. Next, we will look at the Capital Gains Tax rules which apply to the below three different scenarios:

• Selling your primary residence
• Selling your investment property
• Selling your primary residence which you also rented out for a period

What is Capital Gains Tax?

Capital Gains Tax was introduced on 1 October 2001. Although there's the misconception that it's a separate type of tax, it actually forms part of normal income tax and is based on the sliding tax tables for individuals. It arises most commonly for taxpayers, when their home or investment property is sold for a profit (gain) i.e. the proceeds/selling price exceeds the “base cost” . The “base cost” is the purchase price plus amount spent on renovations/improvements.

When you buy and sell your home, there are many expenses to pay e.g. lawyers fees, estate agents commission, bond fees, compliance certificates etc. Knowing which costs to take into account when working out the proceeds and base cost can be tricky! Check out our Capital Gains Tax Calculator for more detailed guidance in this area.

This profit (or capital gain) is taxed at a lower effective rate of tax than normal income – this is because only a portion of the capital gain (currently 40%) is included in taxable income and not the full profit.

This may sound alarming, but the Tax Act does provide a R2 million “primary residence exclusion” for those taxpayers who sell their primary residence (i.e. the home in which they live). This means that the first R2 million of their capital gain is exempt from tax, so most taxpayers won’t in fact need to pay Capital Gains Tax on the sale of their home.

It's important to note that Capital Gains Tax does not arise on the sale of personal use assets. So, there’s no need to declare the details of your recent car sale to the tax man!

Selling your primary residence

In this scenario, the R2 million primary residence exclusion will apply. If the home is sold for a gain (i.e. proceeds less base cost) that is less than R2m, the sale will not attract Capital Gains Tax.

Example 1:

Sam buys a home for R2,500,000. He spends R300,000 renovating it, and then sells it for R4,000,000 a few years later. Sam lived in this house for the entire time that he owned it and therefore it would be regarded as his primary residence for tax purposes. Excluding the capital gain, Sam’s taxable income for 2018 is R500,000.

The capital gain calculation for tax year 2018 is as follows:

Base cost = R2,500,000 + R300,000 = R2,800,000

Proceeds = R4,000,000

Capital gain = R1,200,000 (i.e. R4m – R2,8m)

Less: primary residence exclusion of R2,000,000

Taxable capital gain = nil

You can also use TaxTim’s handy CGT calculator to do the hard work for you.

Because the capital gain on Sam’s primary residence is less than R2m, the entire gain is exempt from capital gains tax and therefore he pays no capital gains tax.

Remember that every individual taxpayer also has an annual capital gain exclusion of R40,000 which needs to be taken into account in determining the final capital gains tax that will be payable.

Selling your investment property (i.e. you don’t live here, but perhaps rent it out)

If you sell a property, which is not your primary residence, you cannot apply the primary residence exclusion to the gain. This means that if the gain is greater than the annual exclusion of R40, 000, it will attract capital gains tax.

Let’s look at the same example again, but assume now that Sam had never lived in the house that he bought. He had rented it to a tenant, while he lived in a nearby property with a friend i.e. he had bought the house purely for investment purposes.

Example 2:

Base cost = R2,500,000 + R300, 000 = R2,800,000

Proceeds = R4,000,000

Capital Gain = R1,200,000 (i.e. R4m – R2,8m)

Primary residence exclusion will NOT apply.

Taxable Capital Gain = R1,200,000 – R40,000 (annual exclusion) = R1,160,000

The inclusion rate for capital gains is 40% for individuals.

Capital gain inclusion in taxable income = 40% X R1,160,000 = R464,000

Sam’s taxable income = R500,000 + R464,000 = R964,000

Sam’s marginal rate of tax is 41% so he will pay approximately R190,240 capital gains tax.

You can also use TaxTim’s handy CGT calculator to do the hard work for you.

Selling your primary residence which you rent out for a period

From the above two examples, you can see that the capital gains tax calculation is quite simple if the use of the property is clear cut i.e. it is either your primary residence or it is never used for this purpose.

However, what if you originally used it as your primary residence, but then moved out and rented it to a tenant, or first rented it out and then used it as your primary residence later on? As mentioned at the start of this blog, this is the situation faced by many confused taxpayers who want to know how this impacts the capital gains tax they need to pay when their property (which was used for different purposes during the period of ownership) is sold.

The answer is that the capital gain on the sale needs to be apportioned between primary residence use and non-primary residence use. The R2m primary residence exclusion is applied to the portion of the gain, which relates to the primary residence use only. This means you will need to pay capital gains tax on the remaining portion of the gain.

Let’s look at the same example again, but assume now that Sam lived in the house for five years and then relocated for work to a different city for three years, during which time he rented out his house. He then sold it eight years after purchasing it.

Example 3:

Base cost = R2,500,000 + R300,000 = R2,800,000

Proceeds = R4,000,000

Capital Gain = R1,200,000 (i.e. R4m – R2,8m)

Primary residence = 5 years
Non-primary residence = 3 years

Portion of the capital gain attributable to the property’s use as a primary residence:

5/8 X R1,200,000 = R750,000
Less: R2m Primary residence exclusion = nil capital gain

Portion of the capital gain attributable to the property’s use as a non-primary residence:

3/8 X R1,200,000 = R450,000
Primary residence exclusion will NOT apply.

Taxable Capital Gain = R450,000 – R40,000 (annual exclusion) = R410,000

Capital gain inclusion in taxable income = 40% X R410,000 = R164,000

Sam’s taxable income = R500,000 + R164,000 = R664,000

Sam’s marginal rate of tax is 39% so he will pay approximately R63,960 capital gains tax.

You can also use TaxTim’s handy CGT calculator to do the hard work for you.

As you can see from the three examples, the amount of capital gains tax payable does vary widely depending on the use of the property. There was no tax payable when it was used exclusively as a primary residence, R190,240 payable when it was not used at all as a primary residence, and R63,960 payable in the event it was used for some of the time as a primary residence and rented out for the rest of the time.

How to reflect the sale in your tax return (ITR12)

In the Capital Gain/Loss section of the opening wizard, indicate that you disposed of an asset and this will open the Capital Gain/Loss section of your tax return.

If the property sold was your primary residence (example 1), tick the Yes block in this section which asks this question. SARS will then apply the R2m primary resident exclusion to the capital gain on assessment.

If the property sold was not your primary residence (example 2), tick the No block in this section which asks this question. On assessment, the primary residence exclusion will not be applied to this transaction.

If the property sold was not your primary residence for the full duration that you owned it, you need to report the details of the property sale as two separate transactions (example 3). You do this by indicating in the opening wizard that two disposals took place. This will open up two capital gains/loss sections so that you can capture the details of each separately.

For example 3, let’s look in more detail how Sam would capture his disposal in his tax return.

He must indicate in the opening wizard that he made two disposals.

Disposal 1:

Primary residence - YES

Proceeds: 5/8 X R4,000,000 = R2,500,000

Base Cost: 5/8 X R2,800,000 = R1,750,000

Gain: R2,500,000 – R1,750,000 = R750,000

SARS will apply the R2m primary residence exclusion on assessment so that capital gains tax will equal zero.

Disposal 2:

Primary residence - NO

Proceeds: 3/8 X R4,000,000 = R1,500,000

Base Cost: 3/8 X R2,800,000 = R1,050,000

Gain: R1,500,000 – R1,050,000 = R450,000

On assessment, the R40,000 annual exclusion will apply and therefore 40% of R410,000 (R450,000-R40,000) will be added to his taxable income.

Reporting your asset disposals to SARS can be confusing and the tax implications of an error can cost you dearly. Let TaxTim help you determine the correct proceeds and base cost to ensure your submission is 100% correct.

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