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How to limit capital gains tax on the disposal of your property

Category Tax Tips

As a taxpayer, you can utilise certain security expenses that have been incurred in improving your primary residence or investment property to reduce the capital gains tax that you may need to pay when you dispose of the property.

When you purchase a property with the intention of keeping it as a long-term asset, you may be subject to capital gains tax when you sell that property.

There is currently a R2m capital gains exclusion on the disposal of a primary residence. This means if the capital gain that you have made on your property is less than R2m, you will not pay capital gains tax on the disposal. However, the purchase price and sale price of your primary residence should still be listed on your tax return in the year that you disposed of that property.

If your capital gain is more than R2m, you will have to pay capital gains tax on the disposal of your primary residence, and the discussion below may assist you in reducing your capital gains tax in such circumstances.

If you have an investment property or second property such as a holiday home that you dispose of, you also need to determine whether there will be any capital gains tax payable as these properties are not subject to the primary residence exclusion.

The basic method of calculating a capital gain is to establish the difference between the cost of acquiring the property or the purchase price and the proceeds from the sale price of the property. There are, however, ways you can legitimately decrease the capital gain, whether on a second property or your primary residence. Improvements to the property can increase its base cost, resulting in a reduction in the capital gain made.

One of the expenses that can be used to reduce the capital gain you realise is that related to security that enhances the property.

Generally, you can use the expenses incurred in installing electric fencing and/or a burglar-alarm system that forms part of your building.

If you live in a sectional-title property (certain security complexes or a block of flats) and the body corporate raises a special levy to make improvements (such as electric fencing) to the common property, the special levy you have paid may be used to reduce the capital gain you have made on the property when you sell it.

In order for these costs to reduce your capital gain, the improvements, such as the electric fencing, must still be on hand at the time you dispose of the property.

The benefit of using security expenditure to reduce your capital gain is best illustrated by means of these examples.

Scenario 1 — capital gain without utilising security expenses:

  • Purchase price of investment property (base cost): R800,000
  • Selling price of investment property: R1,000,000
  • Capital gain: R200,000
  • Capital gains tax (this will depend on your tax rate and circumstances): R36,000

Scenario 2 — capital gain utilising security expenses:

  • Purchase price of investment property: R800,000
  • Security expenditure (electric fencing and alarms): R50,000
  • New base cost: R850,000
  • Selling price of investment property: R1,000,000
  • Capital gain: R150,000
  • Capital gains tax (this will depend on your tax rate and circumstances): R27,000

In other words, by taking into consideration certain security expenses when calculating the capital gain, the person in this example will pay R9,000 less tax on the disposal of the property.

Movable assets used for security purposes, such as firearms or private-vehicle-tracking systems, are personal-use assets and cannot be used to reduce your capital gain. In addition, recurring costs such as the monthly payment to an armed-response company cannot be used to reduce your capital gain.

As a taxpayer, you can utilise certain security expenses that have been incurred in improving your primary residence or investment property to reduce the capital gains tax that you may need to pay when you dispose of the property.

When you purchase a property with the intention of keeping it as a long-term asset, you may be subject to capital gains tax when you sell that property.

There is currently a R2m capital gains exclusion on the disposal of a primary residence. This means if the capital gain that you have made on your property is less than R2m, you will not pay capital gains tax on the disposal. However, the purchase price and sale price of your primary residence should still be listed on your tax return in the year that you disposed of that property.

If your capital gain is more than R2m, you will have to pay capital gains tax on the disposal of your primary residence, and the discussion below may assist you in reducing your capital gains tax in such circumstances.

If you have an investment property or second property such as a holiday home that you dispose of, you also need to determine whether there will be any capital gains tax payable as these properties are not subject to the primary residence exclusion.

The basic method of calculating a capital gain is to establish the difference between the cost of acquiring the property or the purchase price and the proceeds from the sale price of the property. There are, however, ways you can legitimately decrease the capital gain, whether on a second property or your primary residence. Improvements to the property can increase its base cost, resulting in a reduction in the capital gain made.

One of the expenses that can be used to reduce the capital gain you realise is that related to security that enhances the property.

Generally, you can use the expenses incurred in installing electric fencing and/or a burglar-alarm system that forms part of your building.

If you live in a sectional-title property (certain security complexes or a block of flats) and the body corporate raises a special levy to make improvements (such as electric fencing) to the common property, the special levy you have paid may be used to reduce the capital gain you have made on the property when you sell it.

In order for these costs to reduce your capital gain, the improvements, such as the electric fencing, must still be on hand at the time you dispose of the property.

The benefit of using security expenditure to reduce your capital gain is best illustrated by means of these examples.

Scenario 1 — capital gain without utilising security expenses:

  • Purchase price of investment property (base cost): R800,000
  • Selling price of investment property: R1,000,000
  • Capital gain: R200,000
  • Capital gains tax (this will depend on your tax rate and circumstances): R36,000

Scenario 2 — capital gain utilising security expenses:

  • Purchase price of investment property: R800,000
  • Security expenditure (electric fencing and alarms): R50,000
  • New base cost: R850,000
  • Selling price of investment property: R1,000,000
  • Capital gain: R150,000
  • Capital gains tax (this will depend on your tax rate and circumstances): R27,000

In other words, by taking into consideration certain security expenses when calculating the capital gain, the person in this example will pay R9,000 less tax on the disposal of the property.

Movable assets used for security purposes, such as firearms or private-vehicle-tracking systems, are personal-use assets and cannot be used to reduce your capital gain. In addition, recurring costs such as the monthly payment to an armed-response company cannot be used to reduce your capital gain.

Author: DANIEL BAINES - Business Live

Submitted 09 Oct 18 / Views 74