What are the Capital Gains Tax implications of renting out a primary residence?
Hi, you kindly assisted on some previous questions I had, so taking advantage of your kindness, hopefully you can assist with the following:
I purchased a property in January of 2001 for R400,000. This has been my primary residence for the last 17 years and I believe that I can sell for just short of R2m to potentially book a capital gain of R1,6m over the last 17 years.
Previously I considered selling the home to my family trust, but now considering an alternative scenario of keeping the home in our name (married CoP). The question is therefore: what are the Capital Gains Tax implications if I now rent out what used to be my primary residence? Does time apportionment apply and how will this work if say I keep the property for another ten years, but rented out?
I intend to take out a bond on the property for R1,5m to provide some gearing. I am at the max tax rate and my spouse is not employed.
Thanks in advance, P Naidoo
Good day Mr. Naidoo, unfortunately the R2m capital exception that you previously had on your primary residence will fall away as soon as you start a trade (Rent). Exception to the rule below
A capital gain or loss will not be fully excluded in the following circumstances:
- If the capital gain on the sale of a primary residence exceeds R2m, the portion of the capital gain that exceeds R2m will be subject to CGT. Similarly, if you have a capital loss in excess of R2m, only the portion of the loss exceeding R2m will be allowed as a capital loss.
- The capital gain or loss attributable to the portion of a property that exceeds two hectares is subject to CGT.
- The primary residence exclusion does not apply to the portion of a capital gain or loss that relates to a period on or after the valuation date (1 October 2001), in which a person or his or her spouse was not ordinarily resident in a primary residence.
- The primary residence exclusion does not apply to the portion of a capital gain or loss that relates to any part of the primary residence that is used for the purposes of trade. This situation would apply, for example, if you use your study as an office for business purposes or if you let the residence.
Exception to the rule
Deemed domestic usage despite letting; you will be treated as having used your primary residence for domestic purposes despite letting it for a rental if –
you were absent from the residence for a continuous period not exceeding five years;
you or your spouse resided in the residence as a primary residence for a continuous period of at least one year before and after the letting period;
you did not have another primary residence during the letting period; and
you were either temporarily absent from South Africa during the letting period (for example, you worked overseas); or
you were employed or carried on business more than 250 km from your primary residence.
Sale of Property
What happens if you and your spouse hold a primary residence jointly? The primary residence exclusion of R2m is divided according to the interest each of you hold in the primary residence. For example, if you and your spouse have an equal interest in your primary residence, you will each qualify for a primary residence exclusion of R1m (R2m × 50%). You will also each be entitled to the annual exclusion (2017: R40,000) (2018 : R40,000)
Hope this gives you clear indication of what to do.
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Who is Armando Small?
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