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Ask a Tax Man – Should I transfer my home into a trust to buy another home?

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Q

Hi, my primary residence for the last 17 years was acquired for R400,000.  I have spent another R100,000 on improvements but do not have invoices.  The municipal valuation is about R1,5m currently, and I have no mortgage bond on the property.

I plan to acquire another primary property and can rent out my place for about R15,000 per month.  My plan is therefore to sell the property to my family trust for the municipal valuation, and source a bank loan to the trust to fund the purchase price. This should then allow me to take advantage of the Capital Gains Tax (CGT) exclusion on a primary residence and the bank loan to the trust should prevent any section 7c implications. Understand that the rental income and expenses will be in the trust and the trust will pay tax on the profits.

So here are my questions:

  1. Is the above thinking correct?
  2. Can the municipal valuation be used for fair market value (FMV) purposes or do I need an independent valuation as this is a related party transaction?
  3. Are there any issues I should be aware of in terms of tax Implication of me perhaps having to guarantee the bank loan in my personal capacity?
  4. Is the above worth doing given the transfer duty and costs to transfer and raise a bond in the name of the trust?

The trust is inter vivos, and I do have an independent bank trustee in addition to my wife (married in Community of Property). My immediate family and I are the trust beneficiaries – P Naidoo


#AskaTaxMan: Can I recalculate deductions on last year’s return?


A

Good day, thank you for your question. Your assumption is correct.

I note the following points of relevance.

  1. You will have the CGT exclusion on your primary residence to a value of R2m.
  2. The bank loan should prevent any section 7c implications as long as the loan is equal to the sale value of the property.
  3. I would not use the municipal value.  I would still get an independent valuation on the property as municipal valuations are often out-dated and does not take into account the property’s unique features.
  4. There should not be any issues regarding the guarantee that you sign on the loan.

Important! If the bank loan is less than the sale value of the house the shortfall will fall in the scope of Section7c.

Aspects to keep in mind

  • I would not have any profits distributed to the trust as this will be taxed at 45%. Rather distribute these profits to the beneficiaries of the trust; their individual tax rates should be less than 45% per annum.
  • The rental income needs to be market related in the trust.
  • Transfer cost in trust or individuals are the same, as form 1 March 2017 transfer cost on a property of R 1.5m will be R25,500.
  • There will be bond registration and attorney fees to register the property in the trust.
  • If this is the start of a property portfolio please take Section 13Sex of the income tax act into consideration.

Section 13sex applies in respect of new and unused residential units or improvements to a residential unit acquired or constructed on or after 21 October 2008. The unit must be used solely for the taxpayer’s trade, it must be located in the Republic and the taxpayer must own at least five residential units within the Republic that are used by the taxpayer for the purpose of a trade carried on by the taxpayer. The section provides for a 5% depreciation allowance per annum over 20 years.


Got a burning tax question? E-mail mariette@hometimes.co.za and we will be sure to assist you.


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Who is Armando Small?

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Small is a certified tax adviser and owner of Capstone Group. His company provides a range of services from bookkeeping, audits and tax services to secretarial and trust services. He is a self-proclaimed Jack-of-All-Trades who will admit that he is still not entirely sure of what he wants to do with his life. What he does know, however, is that he is not interested in taking employment; he wants to be an employer

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