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What does deducting home office expenses imply for capital gains tax?

Posted 20 November 2012 under Tax Questions

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I'm an academic and also do some mathematical consulting, so I work partly in my study at home. Firstly, am I entitled to deduct a fraction of my household expenses, and if so, is it equal to the percentage x of floor space taken up by my study? But then does this affect how much capital gains tax I'll pay on my flat when I sell it? Is it then is x% of my flat not entitled to a capital gains tax threshold?

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TaxTimTaxTim says:
17 November 2012 at 11:36

You can only deduct home office expenses if you have a dedicated office which is fitted for work and NO other activity takes place in the room. If your consulting does not form part of your income from the educational institutional and is completely separate then you would be able to deduct expenses related to earning that income. The expenses would need to be apportioned yes based on the size of the room against the overall size of the house, unless they are 100% used or expended in that room.

Your primary residence exclusion relating to the sale, that is the capital gains portion that is excluded from being taxed will also need to be apportioned for the part of the flat that was not used for living in based on the same calculation.

Chris says:
17 November 2012 at 11:46

So say the flat was worth R2 million more than when I bought it, and the study was 10% of the floor space of the flat. The primary residence exclusion would usually mean I would pay tax on R2 million - R1.5 million = R500 000, but if I've been deducting expenses for my home office, would only 90% of the flat be considered my primary residence? So would I pay tax on 90% (R2 million) - R1.5 million = R300 000 for my primary residence, and also pay tax on 10% (R2 million) = R500 000 for my home office (with no exclusion)?

Also, does your reply mean that if I'm a university academic who doesn't do any extra consulting but only uses the home office for university work, then I can't claim home office expenses?

TaxTimTaxTim says:
17 November 2012 at 13:03

The primary residence exclusion has been increased to R2 million so in theory you would take the R2m and only 90% of that = R1.8m would be allowed to be subtracted from the Capital Gain.

So for example:

Base Cost - R4m
Proceeds - R7m

Gain = R3m - 90% of R2m = R1.2m Gain which would be included in your taxable income at 33.3% of the gain.

In order to claim a deduction for home office if you are full time salaried employee you would need to either earn more than half of your income from commission or your employer needs to stipulate that you are allowed to work from home and that they do not provide you with an office at their premises Your home office would need to be fitted out as an office and no other use may be made of the room in order to claim the deductions.

Unfortunately SARS are very strict on home office expenditure and have been known to come down hard on taxpayers trying to claim the deduction when they are not entitled to. If you would like to email me on tim@taxtim.com I would be very happy to send you some more information?

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