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A primary residence used partly for trade
- 24 May 2022
- Individuals Tax
- Wessel Smit
A taxpayer selling his home could qualify for the primary residence exclusion of up to R2 million for Capital Gains Tax (CGT) purposes. The term “primary residence” is defined in paragraph 44 of the Eighth Schedule to the Income Tax Act.
The reason this definition has captured the minds of many is due to the exclusion on the gain or loss made on disposal of one’s primary residence.
There are two possibilities:
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If the primary residence is sold for more than R2 million, the first R2 million of the capital gain or loss should be disregarded.
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If the primary residence is sold for R2 million or less and a capital gain is realised, the full capital gain is disregarded.
To qualify as a primary residence, and receive the benefit of the exemption, a residence must be one in which a natural person or a special trust holds an interest.
In addition, the natural person or a beneficiary of the special trust or spouse of the person or beneficiary must ordinarily reside or have resided in the residence as his or her main residence; and use or have used the residence mainly (more than 50%) for domestic purposes.
In order to determine the portion of the capital gain or loss that qualifies for the primary residence exclusion, the following requirements need to be considered:
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The exclusion is limited to a land size of two hectares (on condition that the two hectares are utilised as part of the primary residence)
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The exclusion is limited to the period occupied as primary residence
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The exclusion is limited to the residential use of the primary residence
The capital gain or loss needs to be apportioned regarding each of these three limitations in order to determine the portion of the capital gain or loss that qualifies for the primary residence exclusion.
When a person disposes of a primary residence, the exclusion of the capital gain or loss will apply only to the residential use of the property. Any trade or non-residential use of the primary residence does not qualify for the exclusion. The capital gain or loss should be adjusted with both the period of trade use and the part of the residence that is used for trade.
Therefore, if the taxpayer worked from home and used part of the house as an office, the capital gain should be apportioned between primary residence use and business use. This apportionment must take into account the length of time that the home office was used as a portion of the entire period of ownership, as well as the size of the home office compared to the size of the entire property.
It is important to note that it is the capital gain which is apportioned and not the R2 million exclusion.
Capital gain = proceeds (exceeding R2 million*) less base cost less the portion of the gain that relates to land that is greater than two hectares less the portion of the gain that relates to the period the property was not occupied as primary residence less the portion of the gain that relates to the trade use of the primary residence equals the portion of the capital gain which qualifies for the primary residency exclusion of R2 million.
The portion of the gain that relates to land that is greater than two hectares plus the portion of the gain that relates to the period the property was not occupied as primary residence plus the portion of the gain that relates to the trade use of the primary residence equals the portion of the capital gain that does not qualify for the R2 million gain exclusion and will be subject to CGT in full.
Although a primary residence is used mainly for purposes other than the carrying on of a trade, fixed property is excluded from personal-use assets. The only exclusions from CGT for a capital gain or loss made on a primary residence are the exclusions discussed above.
Therefore, care should be taken when deducting a home office expense for income tax purposes to take the non-residential use of the property into account when calculating the portion of the capital gain which qualifies for the R2 million primary residence exclusion.
Catch-up on our on-demand webinar, CGT: Current Issues, during which Wessel Smit covers some of the complexities around CGT. Read more here.