Explaining Capital Gains Tax on Your Primary Residence

The capital gains tax, which came into affect as of October 2001, is a tax placed on any asset you dispose of minus the original cost of said asset and any improvements made, such as in the case of your primary residence.

Who Will Have to Pay?

All residents of South Africa have to pay a capital gains tax, or CGT, on not only their primary residence in South Africa, but also any other property owned outside of the country. Any non-residents of South Africa who own businesses or private properties in South Africa must also pay a CGT.

The Ins and Outs of the Capital Gains Tax

While preparing your income tax return each year, you will include your capital gains on your sold primary residence, or any other property asset, as part of your taxable income. In order to calculate your capital gains, you will subtract the difference of your property's base cost from your property's sale price. Remember, the base cost will include not only the original buying cost of your primary home, but also other costs you incurred, such as the stamp duty, commission and fees paid to your agent or attorney, and improvement costs.

Of course, there are some additional rules to the South African CGT. If you are considered to be an individual by the South African Revenue Service, your total capital gain's first 10,000 rand will not be counted toward the taxable amount. The total of your gain is the capital gain minus the capital loss. Any total gain after the first 10,000 rand will be taxed at 25%; this rule only applies toward a primary residence. But for property that is not considered a primary residence, the tax will be 50% instead of 25%. These rules apply yearly to your income tax return.

Property Exempt from the Capital Gains Tax

Although most assets are subjected to taxing under the South African CGT, there are a few assets considered to be exempt, such as a residence that is currently occupied by its owner; however, the property must not be worth more than one million rand and have a maximum of two hectares of land adjacent to said property. Also exempt are privately owned automobiles, personal belongings, benefits and annuities from retirement, certain insurance policies, earnings made from gambling, and assets belonging to a small business.

Calculating Your Assets

Evaluating your home's base cost can be done via two methods--valuation and time apportionment. In the case of the valuation method, the value of your property as of October 2001 must be known. As for the other method, time apportionment, you will need to calculate the property's total capital gain dating back to the moment it was purchased up to the time it was sold. From there, you will need to find out what portion of its gain occurred after the first day of October 2001. Be advised that if you choose time apportionment, the calculation of the capital gain will be slightly more difficult.