Capital gains tax exemption on primary property

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Capital gains tax exemption on primary property
Sep 26 2014 13:54 Fin24

A Fin24 user is not sure whether he qualifies for an exemption of capital gains tax on the sale of his property. He writes:

My wife and I bought a two bedroom townhouse in 2005 and stayed in it until 2008.

We decided to rent a three bedroom townhouse from 2008 after having kids.

My mother-in-law moved into the original property until such time as we could afford to buy a house with a granny flat, including the sale of the original property. This is now possible in 2014.

Do I qualify for the capital gains tax (CGT) primary residence exemption as the two bedroom townhouse is our only property?

Pieter Faber, technical executive: tax law & policy at the SA Institute of Tax Professionals (Sait), responds:

The primary residence exclusion is dealt with in paragraphs 44-51A of the Eighth Schedule to the Income Tax Act.

By definition the “primary residence” exclusion requires firstly, a natural person or trust to hold an “interest” in the property and secondly, that the person or his or her spouse ordinarily resides there and uses the residence mainly for domestic purposes.

An “interest” in property would include a real right of ownership (including co-ownership as in the current matter) and also the right of use as a lessee.

Where more than one natural person holds an interest, the exclusion must be apportioned in terms of each spouse’s pro rata interest.

For example, if the wife owns a 50% interest she would be entitled to only 50% of the primary residence exclusion.

The “primary residence” exclusion has two alternate monetary parts, namely disregarding firstly, the capital loss or gain where it is less than R2m or secondly, disregarding the gain where the total proceeds is less than R2m.

The former exclusion is based on the capital gain or capital loss, thus the proceeds less base cost.

The latter exclusion is only available where the person or his or her spouse was ordinarily resident in the property throughout the period – that is from October 1 2001 or a later date of acquisition – to date of sale and did not use any part of the property for carrying on a trade.

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In the current instance, only the first exclusion calculation can be used as the persons were not ordinarily resident in the residence throughout the ownership period.

They would then, in terms of paragraph 47 – if the mother paid no rent – or paragraph 49 if rent was paid, have to apportion the exclusion for the time period they were not so ordinarily resident at or leased the property.

Furthermore, the capital gain or loss to be disregarded must be calculated separately for the spouses for each spouse’s own tax liability.

We assume that the husband and wife each held a 50% in the property from 2005-2014.

During this period they were only ordinarily resided there for 33.33% – that is three out of nine years – of the full time period.

The primary residence exclusion of the capital gain or capital loss for each spouse in terms of paragraph 45(1)(a) would, therefore, be equal to R333 333.33 – that is R2m times 50% times 33.33%.

– Fin24

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