Taxpayer owns 2 properties. One of them was his primary residence and the other he was renting out. A year ago taxpayer had to relocate for work purposes and due to this, he moved from the primary residence to a house he is now renting. He then rented out
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
The mere change in the use of the primary residence is not a disposal event – see paragraph 12 of the Eighth Schedule – primarily because a personal use asset does not include immovable property – paragraph 53(3)(f).
The issue is specifically dealt with in the legislation. The principle is that the primary residence exclusion (the R2 million one provided for in Part VI of the Eighth Schedule) does not apply where the individual used that residence (or a part thereof) for the purposes of carrying on a trade – see paragraph 49(b) of the Schedule. The use of the property to derive rent would constitute the carrying on of a trade.
Paragraph 48, of the Schedule, provides that a natural person must for purposes of paragraph 47 be treated as having been ordinarily resident in a residence for a continuous period (not exceeding two years), if that person did not reside in that residence during that period for any of the following reasons-
(a) at the time the residence was that person's primary residence it had been offered for sale and vacated due to the acquisition or intended acquisition of a new primary residence;
It may not be available to the parties in this instance – it appears from the facts that the period exceeds two years.
So, in this instance an apportionment of the capital gain will have to be made under paragraph 49. The result would be that the capital gain attributable to the trade use will result in a capital gain that doesn’t qualify for the R2 million exclusion. The primary residence exclusion would be available to the period before the trade use thereof.
SARS deals with this, and gives some good examples of how the calculation is done, in paragraph 11.8 of their CGT guide (issue 7).
Do remember that, subject to paragraph 48, only one residence may be a primary residence of a person or a special trust for any period during which that person or special trust held an interest in more than one residence – paragraph 45(3).