Primary Residence Exclusion

Primary Residence Exclusion

• 08 August 2013
• Individuals Tax
• ENS

Important:

This article is based on tax law for the tax year ending 28 February 2014.

Author: ENS (Integritax July edition)

Is it true that globally mobile employees can sell their homes and not pay capital gains tax even if they rented it out for a number of years?

It is true in most cases. The general rule is that when you sell your home, the capital gain realised on the sale is excluded from capital gains tax up to a limit. Based on the Income Tax Act No. 58 of 1962 (the Act), you will pay no capital gains tax on the first R2,000,000 you make when you sell your home. There are, however, some restrictions on this exclusion.

In order for the sale to be excluded, the home must be considered a primary residence based on income tax rules. These rules state that you must have used the home as your "primary residence”. Suppose that you are a globally mobile employee and invest in a new home in South Africa. You live in it for the first year, get a foreign assignment and rent the home for the next three years and, when the tenants move out, you move back in for another year. At the end of this five-year period, you sell your home.

How do you work out your capital gains tax liability? You used the property as your primary residence for two of the five years. Applying the primary residence test your capital gains tax exclusion should only apply to those two years. Actually no, you may be able to sell the residence and not pay any capital gains tax at all. How is this achieved?

First, you must ensure that during the three year rental period you were either temporarily absent from South Africa or you were employed at a location further than 250 kilometres from the residence. Second, you must have resided in the home for a period of 1 year before and a period of one year after the rental period. Third, no other residence became your primary residence during the three year rental period. Fourth, and lastly, your period of absence from your home must not have exceeded five years.

If you satisfy all these requirements then you will be treated as having used the home for domestic purposes during your period of absence even if you were renting it out during that time. This means that you will be able to claim the capital gains tax exclusion in full and not only for the two years that you actually stayed in the home.

FAQs

1. What is the primary residence exclusion in South African tax law?

The primary residence exclusion allows homeowners to reduce or eliminate capital gains tax (CGT) on the sale of their main home, provided certain conditions are met.

2. How much is the primary residence exclusion for capital gains tax?

South African tax law allows a R2 million capital gain exclusion on the disposal of a primary residence. This means the first R2 million of gain is tax-free if the home qualifies.

3. Who qualifies for the primary residence exclusion?

Individuals qualify if the property is their main home, they ordinarily reside there, and they use it primarily for domestic purposes rather than business or rental.

4. Does the exclusion apply if I rent out part of my home?

If only part of the home is rented out or used for business, the exclusion is apportioned. Only the portion used as a primary residence qualifies for the R2 million exemption.

5. Can a holiday home qualify for the primary residence exclusion?

No. A holiday home or secondary property does not qualify, as the exclusion only applies to the home where the taxpayer normally resides.

6. What happens if a primary residence is owned jointly by spouses?

If spouses jointly own a primary residence, each is entitled to their pro-rata share of the R2 million exclusion when the property is sold.

7. Does the exclusion apply if I own more than one home?

No. You can only claim the exclusion on one primary residence. SARS will determine which home qualifies based on where you ordinarily live.

8. How is the capital gain calculated when selling a primary residence?

The capital gain is calculated as the selling price minus the base cost (purchase price plus improvements). The R2 million primary residence exclusion is then applied.

9. Can I still claim the exclusion if the property is held in a trust or company?

Generally, the exclusion applies only to natural persons, not to properties held in a trust or company, unless special circumstances exist (e.g., a special trust).

10. Should I get professional advice when selling my primary residence?

Yes. Because capital gains tax rules can be complex, especially where partial business or rental use applies, it’s wise to consult a tax practitioner or accountant.

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