Tax returns when selling
CAPITAL GAINS TAX: CAN BE REDUCED BY R30 000 A YEAR
Wendy Foley from Citadel advises a reader who is selling a house that he was renting out.
Question: I bought a house in Pretoria in December 2011 for about R1 million. I moved in October 2013 to Johannesburg and decided to rent it out.
I did not buy a new place as I intended to eventually move back to Pretoria. With the rent I received, I paid rates and levies of around R2 000 per month, but no municipal rates. I decided in February 2015 that I wanted to sell my house.
How has all of this affected my tax return?
For the past two years, I have included the rental income in my return, while deducting items such as interest and levies. I paid the full outstanding municipal rates when I sold in June 2015. For the 2016 tax year, can I deduct all of the rates for the period that I was renting out the property, which is about 18 months?
Am I eligible for the R2 million exemption on capital gains tax for a primary residence? Answer: Any rental income should be added to any other taxable income you may have, and assessed in its entirety.
The taxable amount of rental income may, however, be reduced, as you may incur expenses. Only expenses incurred in the production of that rental income can be claimed. Any capital and/or private expenses won’t be allowed.
Expenses that may be deducted from taxable income are your rates and taxes, interest on the bond, advertisements, fees paid to estate agents, homeowners insurance (not household contents), garden services, repairs in respect of the area let and security and property levies. Maintenance and repairs should be noted as specific costs and not confused with improvement costs. Improvements are a capital expense and cannot be an expense. They can, however, be included in the base cost of the property to effectively reduce capital gains tax (CGT). You would be able to deduct the full R30 000 in the 2016 tax year.
Legislation entitles individuals to disregard any capital gain on the disposal of their primary residence if under R2 million.
A residence is treated as having been used for domestic purposes during any continuous period of absence, while the residence is being let under the following circumstances:
1) The residence must not be let for more than five years. You must have resided there continuously for at least one year before and one year after the period of absence.
2) You treated no other residence as a primary residence.
3) You were temporarily absent from the Republic or employed or engaged in carrying on business in the Republic at a location further than 250km from the residence.
You do not meet all the requirements as you were not further than 250km away and you did not move back in for at least a year afterwards.
It would therefore appear that you would not get the R2 million exemption and you would be liable for CGT on the sale of the house.
Wendy Foley CFP is an advisory partner with Citadel in Johannesburg.
Maintenance should not be confused with improvement costs.