Sunday Times

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

- Daniel Baines Business · Tax Credit · Taxes · Purchase, New York

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 pri­vat­eve­hi­cle-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 arme­dresponse com­pany can­not be used to re­duce your cap­i­tal gain.

Baines is the au­thor of How to Get a Sars Re­fund. He is a tax con­sul­tant at Mazars

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