Key Takeaway: Selling your home is a huge financial milestone. While the profit is exciting, it’s crucial to understand Capital Gains Tax (CGT). In short, CGT is a tax on the profit you make from selling your property. The good news is that for most South Africans selling their primary home, a R2 million exclusion on this profit means you likely won’t pay any CGT.
That Big Payout From Your Sale? Let’s Talk About the Tax Man.
You’ve sold your house, and a significant amount of money is heading your way. It’s a moment of relief and excitement. But a nagging question often follows: “How much of this money do I actually get to keep?” The term “Capital Gains Tax” or “CGT” gets thrown around, and it can sound intimidating. This guide, from your friends at Future Finance, will walk you through everything you need to know, making a complex topic simple and clear.
Decoding Your Capital Gains Tax
1. The Most Important Rule: The Primary Residence Exclusion
Let’s start with the best news. For most homeowners, the anxiety around CGT is unnecessary. The South African Revenue Service (SARS) allows for a primary residence exclusion. This means that if you are selling the home you live in, the first R2 million of your capital gain (profit) is tax-free. If you and your spouse co-own the property, this R2 million exclusion is split between you, at R1 million each. This rule alone means that the vast majority of property sellers in South Africa do not pay any Capital Gains Tax.
2. Calculating Your Profit (The Base Cost Explained)
It is essential to understand that CGT is a tax on the profit you make, not the total selling price. To determine your profit, you need to calculate your property’s “base cost.” The base cost is the sum of all the expenses you’ve incurred in buying, improving, and selling your home. The higher your base cost, the lower your capital gain.
Here’s a simple breakdown of what you can include in your base cost:
- The original price you paid for the property.
- Transfer costs and duties you paid when you first bought the home.
- Costs of capital improvements. This includes significant upgrades that add value to your property, such as a new kitchen, an extension, a swimming pool, or an alarm system. General maintenance, like repainting, does not count as a capital improvement.
- The estate agent’s commission from the sale.
- Other selling costs, such as your conveyancer’s fees and the cost of obtaining electrical and other compliance certificates.
3. A Simple, Step-by-Step Calculation
Let’s put this into practice with a couple of examples:
Example 1: Your Primary Residence
You sell your family home for R3.5 million.
Your base cost is calculated as follows:
- Original purchase price: R1,200,000
- Transfer costs when you bought it: R80,000
- New kitchen and bathroom renovations: R200,000
- Estate agent’s commission: R175,000
- Conveyancing and certificate costs: R45,000
- Total Base Cost: R1,700,000
Your Capital Gain is: Selling Price (R3,500,000) – Base Cost (R1,700,000) = R1,800,000
Because this is your primary residence, the R1.8 million gain is less than the R2 million primary residence exclusion. Therefore, your Capital Gains Tax payable is R0.
Example 2: An Investment Property
Now, let’s say you sell an investment property for R2.5 million.
Your base cost is calculated as follows:
- Original purchase price: R1,000,000
- Transfer costs when you bought it: R70,000
- Capital improvements (new geyser and security gates): R30,000
- Estate agent’s commission: R125,000
- Conveyancing and certificate costs: R35,000
- Total Base Cost: R1,260,000
Your Capital Gain is: Selling Price (R2,500,000) – Base Cost (R1,260,000) = R1,240,000
For a second property, you get an annual exclusion of R40,000. So, your taxable gain is R1,240,000 – R40,000 = R1,200,000.
As an individual, only 40% of this gain is included in your taxable income for the year (this is the “inclusion rate”). So, R1,200,000 x 40% = R480,000.
This R480,000 is then added to your other income for the year and taxed at your marginal tax rate.
While this guide covers the essential rules, it’s important to remember that tax law can be complex and is subject to change. For this reason, this article should be seen as an educational resource, not as direct financial or legal advice. To ensure you are meeting all your obligations and taking advantage of every allowable deduction, we always recommend speaking with a certified tax professional.
From Tax Anxiety to Financial Clarity
Understanding these rules empowers you to calculate your obligations confidently and plan accordingly. By keeping meticulous records of all the costs associated with your property, you can ensure you don’t pay a cent more in tax than you are legally required to. For more detailed information, you can always refer to the official SARS website on Capital Gains Tax. And for a broader look at the expenses involved in a property sale, see our guide, “Understanding the Costs of Selling a Home“.
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FAQ: Your CGT Questions Answered
How is Capital Gains Tax calculated on a property?
Capital Gains Tax is calculated on the profit (capital gain) you make from the sale.[3] This is determined by subtracting the “base cost” (what you paid for the property plus all related costs of buying, improving, and selling) from the selling price.[3]
Do you always pay tax when you sell your main house?
No. If the property is your primary residence, the first R2 million of the capital gain is exempt from tax.[2] Given property price increases, most South Africans selling their main home do not pay any Capital Gains Tax.
What costs can I deduct to reduce my Capital Gains Tax?
You can deduct a wide range of costs to increase your “base cost” and therefore reduce your taxable profit. These include the original purchase price, transfer costs and duties you paid when buying, the cost of any capital improvements (like renovations), the estate agent’s commission on the sale, and your conveyancing fees.
What is the primary residence exclusion?
The primary residence exclusion is a tax break from SARS that allows you to exclude the first R2 million of capital gain from tax when you sell your main home.[2] To qualify, the property must be your primary residence.
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This guide was written by the property finance experts at Future Finance. Understanding your tax obligations is a key part of managing your finances during a property sale. Our core service, Property Bridging Finance, helps you manage your cash flow during this exact period, even providing the funds needed to settle municipal accounts to get your clearance certificates. We believe in empowering South Africans through every financial stage of their property journey.
