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FAQs: Primary Residence
If your CGT question is not dealt with in this list of FAQ's, please address your query to cgt@sars.gov.za
1. Will the sale of my primary home be subject to CGT?
The first R1.5 million of gain or loss on disposal of a primary residence must be disregarded. This concession, known as the primary residence exclusion, means that most individuals will not be subject to CGT on the sale of their homes.
Thus if the primary residence is sold for a gain of R2 million, the first R1.5 million is excluded and the remaining R500 000 is subject to CGT.
2. What is a primary residence?A residence must meet certain basic requirements before it may be considered a primary residence (Paragraph 44 of the Eighth Schedule).
- It must be a structure, including a boat, caravan or mobile home, which is used as a place of residence by a natural person.
- A natural person or special trust must own an interest in the residence.
- The natural person with an interest in the residence, beneficiary of the special trust, or spouse of that person or beneficiary must ordinarily reside in the home and must use it mainly for domestic purposes as his or her ordinary residence.
Where the primary residence is disposed of together with the land on which it is situated (including unconsolidated adjacent land) the R1 million exclusion will apply to land -
- to the extent that it does not exceed two hectares,
- that is used mainly for domestic and private purposes together with the residence, and is disposed of at the same time and to the same person as the residence.
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3. I enter into a long-term lease for a building which I then use as my primary residence. I then sell this right for a R2 million profit. Can I claim the R1.5 million exemption?
Yes, provided it satisfies the requirements of a primary residence. For the purpose of the discussion that follows only the nature of a lease is focused on
'primary residence' means a residence—
(a) in which a natural person or a special trust holds an interest; and
(b) which that person or a beneficiary of that trust or a spouse of that person or beneficiary—….
'an interest' means—
(a) any real or statutory right; or
(b) a share owned directly in a share block company as defined in the Share Blocks Control Act, 1980 (Act No. 59 of 1980) or a share or interest in a similar entity which is not a resident; or
(c) a right of use or occupation, but excluding
(i) a right under a mortgage bond; or
(ii) a right or interest of whatever nature in a trust or an asset of a trust, other than a right of a lessee who is not a connected person in relation to that trust;
A long-term lease is a right of use or occupation. This is confirmed by the Explanatory Memorandum (page 77):
‘the third envisages the case of, for example, a 99-year lease or any similar right, which may be disposed of by a qualifying person without ownership in the actual residence being affected.’
4. (a) Is the primary residence exclusion an unlimited exclusion?
No, certain limits have been placed on the exclusion.
-
The exclusion will not apply to any capital gain or loss in excess of R1.5 million. This means that where the primary residence is sold, say for a gain of R2 million, the first R1.5 million of the capital gain is excluded while the remaining R 500 000 is subject to CGT (paragraph 45(1) of the Eighth Schedule).
-
A person may not claim the primary residence exclusion for more than one residence at a time (par 45(3) of the Eighth Schedule). You can only have one primary residence at a time.
4.(b) Will it apply to a residence held through a company or a trust?
No, the owner is not a natural person. However, the estate planning, limited liability, or other considerations that led to the property being placed in a company or trust may outweigh the advantage of the primary residence exclusion
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5. What happens if I dispose of my primary residence in a joint estate, and I have a capital gain in excess of R1.5 million?
Where a property is sold that falls within the joint estate of spouses married in community of property, the disposal will be treated as having been made in equal shares by each spouse and the primary residence exclusion will be apportioned between them .(paragraphs 14 and 45(2) of the Eighth Schedule )
Example
Husband Spouse Joint
|
Proceeds |
R2 000 000 |
R2 000 000 |
R4 000 000 |
|
Less base cost |
R 500 000 |
R 500 000 |
R1 000 000 |
|
Gain |
R1 500 000 |
R1 500 000 |
R3 000 000 |
|
Less exclusion |
R 750 000 |
R 750 000 |
R1 500 000 |
|
Capital gains |
R 750 000 |
R 750 000 |
R1 500 000 |
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6. What happens if I do not ordinarily reside in my home as I have moved before selling it, I am still building a home on a new property, or for some other reasons?
You will be treated as having been ordinarily resident in your primary residence if you were not ordinarily resident during a period not exceeding two years for any of the following reasons (paragraph 48 of the Eighth Schedule):
- Your old primary residence was in the process of being sold whilst a new primary residence was acquired or was in the process of being acquired.
- Your new home was undergoing renovation or improvement prior to your taking up residence.
- Your home was being built on land acquired for the purpose of being your primary residence.
- Your primary residence had been accidentally rendered uninhabitable.
A residence is treated as having been used for domestic purposes during any continuous period of absence there from while the residence is being let under the following circumstances:
- The residence must not be let for more than five years.
- You or your spouse resided in the residence for a continuous period of at least one year prior to and one year after period of absence.
- You treated no other residence as a primary residence during your absence.
- You were temporarily absent from the Republic or employed or engaged in carrying on business in the Republic at a location further than 250km from that residence.
(Paragraph 50 of the Eighth Schedule)
7. I work in Johannesburg where I bought a townhouse to stay. My wife and three children still stay in Umtata, my hometown, where I have my main home. Will the sale of my townhouse qualify for the primary exclusion when I move back to Umtata?
You will have to choose which of the two residences is to be regarded as your primary residence. If you choose the townhouse then the proceeds from the sale of the townhouse would qualify for the primary exclusion. However, should you later dispose of your house in Umtata, any capital gain or loss on disposal would be subject to CGT for the period that you stayed in your townhouse. This follows from the point made in the answer to question 4(a) above that a person may not claim a primary residence exclusion for more than one residence at a time (paragraph 45(3) of the Eighth Schedule).
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8. I own a flat via shares in a share block company. I reside in the flat when on holiday, and rent it out the rest of the year. What will the CGT implications be if I sell my shares in the share block company?
The capital gain made on the sale of the shares will be subject to CGT as the flat will not qualify as a primary residence.
One of the basic requirements for a flat to qualify as a primary residence is that the owner, beneficiary of a special trust, or spouse of the owner or beneficiary must ordinarily reside in the home and must use the home for domestic purposes as his or her ordinary residence.
9. I am married to three wives in terms of customary law. My wives stay in three different homes that I own. Which home is my primary residence for CGT purposes?
Following the coming into force of the recognition of Customary Marriages Act, 120 of 1998, on 15 November 2000, each of your wives is recognised as a spouse. You will have to choose which of the three residences is to be regarded as your primary residence. You should always bear in mind the point made in the answer to question 4 above that a person may not claim a primary residence exclusion for more than one residence at a time.
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10. If a salaried employee owns a house that he lives in and owns a second property that was let out, is he liable for capital gains tax on the second property which he sold? The same scenario but assume the taxpayer gives the tenant notice on the second property and then moves into the second property and lives in the second property. He then advertises the second place for sale. Is he liable for capital gains tax on the second property when he sells it? Is there a period that a person must live in a property for it to be classified as his permanent residence?
Yes
Yes, he will be liable for capital gains tax in respect of that period that he let out the residence. Assume the taxpayer let out the property from 1 October 2001 to 30 September 2002 and then lived in the residence for another two years before selling it. He will be liable to capital gains tax in respect of one third of the capital gain on the disposal of the property. There is no minimum period that a person must live in a residence to claim it as his primary residence. However, that taxpayer must be able to convince SARS that the residence is his or her ordinary residence. A word of warning. A taxpayer who buys and sells properties at short intervals runs the risk of being classified as a trader in properties in which case any profits on disposal will be taxed in full.
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11. I bought a property smaller than 2 hectares in Bantry Bay in 1980 for R98 000. We have lived in the house and maintained it with painting, etc. Also did some improvements amounting to R152 000 over the last 20 years. The current market value is R3 500 000 in today’s market. Would I be liable for CGT if I sold the property for R4 250 000 five years after valuation date?
There are three possible methods for determining the gain on this property.
Market value
- Proceeds R4 250 000
- Market value R3 500 000
- Gain R 750 000
Time Apportionment Base Cost
- Proceeds R4 250 000
- Time apportionment base cost * R3 450 000
- Gain R 800 000
20% of Proceeds
- Proceeds R4 250 000
- 20% R 850 000
- Gain R3 400 000
You would be permitted to select any one of the three gains above and would select either the gain of R750 000 determined using the market value or the gain of R800 000 determined using the time apportionment base cost method. You would not be liable for capital gains tax on the disposal of the residence in either case, as the first R1.5 million of any gain or loss in respect of a primary residence is disregarded for capital gains tax purposes. Note that the market value method of determining the base cost will only be available to you if you valued the residence and completed the prescribed valuation form on or before 30 September 2004 and completed the prescibed valuation form. The valuation form is available on this website under CGT / Forms.
* Original cost + (Proceeds – Original cost) X Years before valuation date
Years before valuation date Years after valuation date
= 250 000 (4 250 000 – 250 000) x 20
20 5
= 250 000 4 000 000 x 20
25
= 250 000 3 200 000
= 3 450 000
Note that the number of years before valuation date in the formula above is limited to 20 years where an improvement to the property has been made before the valuation date. This compensates for the fact that the formula treats all improvements before valuation date as if they were made at the beginning of the period. Note also that a part of a year is treated as a full year.
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12. A couple have lived on a boat (longer than 10m) for a number of years. The boat is their primary, and indeed only residence. Will they be exempt from CGT if they sell the boat or will SARS seek to tax any gain on disposal?
A boat used as a place of residence by an individual is specifically included in the definition of residence, as is a mobile home and a caravan. A boat will therefore qualify for a primary residence exclusion on the same basis as a more conventional residence.
13. Is the primary residence exclusion of R1.5 million subject to apportionment?
There has been confusion regarding this point amongst some tax consultants but in our view the law is clear. One has to first calculate the overall capital gain or loss on sale of the residence. Next you must work out what portion of that gain or loss relates to the primary residence. For example, if 10% of the residence was used as a home office, and there was a capital gain of R2 000 000, then the capital gain attributable to the primary residence is R1 800 000 (R2 000 000 x 90%) and the R1.5 million exclusion is applied in full against this figure. So R300 000 (the portion of the gain not covered by the R1.5 million exclusion) and R200 000 (the portion of the capital gain which is not in respect of a primary residence) would be subject to CGT. The only time that the R1.5 million is apportioned is when more than one person has an interest in a residence. For example, if husband and wife each own 50% of a residence then they will each only be entitled to R750 000.
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14. More than 50% of my home is used for business purposes. Do I qualify for the R1.5 million exclusion?
No – in terms of the definition of a primary residence contained in para 44 of the Eighth Schedule, a primary residence must be used mainly for domestic purposes.
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