plan4cgt - Residences - primary, introduction and summary

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On this page - General introduction and when disposals of residences are taxable.

 

 

Residences and Primary Residence

Introduction and summary of when you can be taxed

Probably the most well known aspect about CGT is the fact that upon the disposal of your primary residence, up to R1million is excluded from the CGT net. Exactly how this R1million exclusion works is probably the most misunderstood aspect of CGT. There are all kinds of apportionments that can take place, some in conjunction with others.

In order to appreciate the table set out below, we will introduce a relatively easy to understand circumstance, (in the numerical example immedaitely below), where the capital gain is apportioned into its qualifying and non-qualifying exclusion elements. This is just one type of apportionment.

Numerical example-

If a portion of your primary residence has been let out, that portion that has been let will not ordinarily qualify for the primary residence exclusion. It is not difficult to see why - as the part that was let did not act as a primary residence. (Complicating the matter still further, is the fact that at one time you may have occupied the house as wholly a primary residence and then let out a portion, and even further, you may at a later stage have let the entire house. We will ignore these complicating factors for now – we’ll start at the basics).

Assume you acquire a house on 1 October 2001 for R1.2million and you immediately let 25% of that house, the remainder you occupy as a primary residence until such time that it is sold for R2million/R3million.

                                                                              Sell for R2m  Sell for R3m

Proceeds                                                                    2 000 000     3 000 000

Less Base cost                                                          1 200 000     1 200 000

Capital gain                                                                  800 000      1 800 000

Apportionment of gain-

Taxable - Not qualifying for exclusion, (25%)         200 000         450 000

Gain qualifying for exclusion                                     600 000      1 350 000

Primary residence exclusion, (up to R1million)        600 000     1 000 000

Taxable                                                                                Nil         350 000

Total taxable                                                                200 000        800 000

Notes and observations relating to above example –

It is not the quantum of the exclusion that is apportioned; it is the capital gain, (or for that matter the capital loss ), that is apportioned into the element that qualifies to be excluded from the CGT net and into that that doesn’t.

The apportionment is based on the following logic – “How much of the capital gain/loss is attributable to the residence being a primary residence”. In the first case it is R600 000 and in the second case it is R1 350 000. (The R1million limitation then applies.)

It is evident that even if a residence does not act as a primary residence in its entirety, it is still possible to enjoy the full R1million exclusion, (as per the last column).

Circumstances where the disposal of a residence is likely to be subject to CGT

Circumstance

Effect

Residence sold is owned by a person other than natural person or special trust.

Gain fully taxable. Does not qualify as a primary residence at all as the residence has to be owned by a natural person or special trust. .

More than 50% of the residence has never been occupied for domestic purposes.

Gain fully taxable. Does not qualify as a primary residence was not wholly or mainly used for domestic purposes.

The residence is a primary residence but is partly used for business purposes/renting out.

The portion of the gain that qualifies for the exclusion relates to that part of the residence that acts as a primary residence, (see above example). There are (restrictive) exceptions to the renting out rule and the gain may nevertheless be fully excluded from the CGT net.

The residence was a primary residence but another residence took its place as the primary residence.

The portion of the gain that qualifies for the exclusion relates to the time period that the residence was the primary residence. There are limited exceptions to this rule. The time period runs from 1 October 2001, (or the date of acquisition if later), to the date of disposal.

The land on which the primary residence is situated is greater than two hectares.

Only two hectares of land on which the primary residence is situated qualifies for the exclusion. Some of the gain will in all likelihood be taxed.

You become a non-resident.

The portion of the gain that qualifies for the exclusion relates to the period,  (measured from 1 October 2001, or later if acquired after that date), that the residence was the primary residence, in relation to the overall period of ownership, (as measured from the same starting date). The primary residence period will at the latest end when you become non-resident. There is no deemed disposal of fixed property upon becoming a non-resident, as such, the CGT impact will arise when disposed of in some other manner.

You dispose of two primary residences at the same time.

Likely to be a CGT impact. Principles noted in many of the above will apply. As a general rule you can only have one primary residence at any one time, (there are exceptions).

You subdivide the land and sell off one portion.

Could be a CGT impact, it depends on whether the land sold was that that housed the primary residence.

You subdivide the land and sell off both portions.

Could be a CGT impact. There is one  circumstance where the primary residence rules will not be breached.

The capital gain on the disposal of the primary residence is greater than R1million.

Definitely a CGT impact as the primary residence exclusion is limited to R1million. The principles noted in the above points also apply.