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[FAQ] Capital Gains Tax on a primary residence when married out of community of property
- 23 November 2020
- Individuals Tax
- Piet Nel
Background
Two taxpayers are married out of community of property and their primary residence is registered in both their names. Will the capital gain be calculated on the full amount of the gain or will it be split between the two taxpayers when submitting their individual tax returns?
Answer
Income Tax Act
The relevant law is found in paragraph 45 of the Eighth Schedule to the Income Tax Act. Paragraph 45(2) states that where “more than one natural person … jointly holds an interest in a primary residence at the same time, the amount to be disregarded in terms of subparagraph (1) must be apportioned in relation to each interest so held.” The ‘amount to be disregarded’ is the R2 million, but one must first determine the capital gain (or loss).
Paragraph 45(1) states that “a natural person … must, when determining an aggregate capital gain or aggregate capital loss, disregard so much of a capital gain …” Because the individual’s asset is a one-half interest, the capital gain will be calculated with proceeds of one-half of the amount received on the disposal of the residence. The resulting capital gain, after taking the base cost into account, is then the amount that qualifies for the paragraph 45 exclusion.
Application of the principles
SARS agrees with this. They state that the primary residence exclusion operates “on a ‘per primary residence’ basis and not on a ‘per person holding an interest in the primary residence’ basis.” But they also state that “when more than one person holds an interest in the same residence, the primary residence exclusion and the proceeds threshold are split only between those persons who occupy the residence as their primary residence. The interests of persons who do not reside in the residence as their primary residence are not taken into account.”
Webinar Commentary
Further webinar commentary on Primary residence exclusion can be accessed here.