When dealing with new mortgage bond applications there is often a fear in buyers' minds (as a result of being wrongly advised) that when they eventually come to sell their homes they will lose much of the profit of their primary asset, as a result of Capital Gains or other taxes.
The Capital Gains Tax system favours the buyer who chooses an inexpensive property for his family which serves as his primary residence.
“A great deal of education is still required on this subject because less informed members of the public hold back from becoming property owners through fear of loosely defined taxes,” says Mike van Alphen, National Manager of the Rawson Property Group’s bond origination division, Rawson Finance.
The Capital Gains Tax system, says van Alphen, is, in fact, slanted in favour of the small man who buys an inexpensive property in which he and his family will live, i.e. which will serve as his primary residence. In these cases a R1.5 million capital gain or loss is disregarded for tax purposes. Furthermore, if the total proceeds of the sale of a primary residence do not exceed R2 million, any capital gain or loss is also disregarded. The only important exception to this rule, he says, is that if part of the premises have been used for trade or as a work-from-home office, as that portion of the building is rated on a different tax basis.
In effect, says van Alphen, around 75 percent of all South African homes will never pay Capital Gains Tax in the near future when sold because the gain is less than R1.5 million or the total proceeds are less than R2 million.”
In many cases where the capital gain slightly exceeds R1.5 million or the total proceeds are just above R2 million, the apparent gain can be significantly reduced by claiming (as is allowed by law) for any improvements carried out by the owner. Van Alphen says that in one case where he was involved, the home was exempted from Capital Gains Tax because it was the owner’s primary residence and the ‘gain’ was significantly reduced by giving SARS evidence that during the owner’s occupation period a garage had been upgraded to a bedroom, a long front porch added to the building, French doors inserted in three places and new gutters, a skylight and a swimming pool had been installed on the property.
“These improvements had cost the owner close on R400 000, which was just sufficient to reduce his gain to below R2 million,” says van Alphen.
Van Alphen points out that if a husband and wife are joint 50/50 owners of a property, they will each qualify for primary residence exclusion of R750 000 and an annual tax exclusion of R20 000 (on the current rate). There are, therefore, no disadvantages to being joint owners.
A few badly misinformed people, adds van Alphen, have believed that they could claim bond interest payments against their Capital Gains Tax. This, he says, would make almost no homes in South Africa liable for the tax and the government certainly could not afford to lose such a steady and reliable source of income.
“It is, however, interesting to note, that Germany, the USA - and at one stage the UK - have given small tax rebates to bond payers who are paying off primary residences. This has been one of the major reasons why home ownership in these countries has been so popular,” says van Alphen.
Asked if the exclusion of secondary properties from tax exemption makes them less attractive as investments, van Alphen says that, on the contrary, on secondary properties which are rented out by the owner, he can deduct not only all improvements (as in the case of primary residences) from his rental income but also all maintenance costs, even the occasional visit by a plumber or electrician.
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