Deducting home office expenses from your taxable income

IT WAS all fun and games, when it became known to me that the South African Revenue Service (Sars) would allow me to deduct all my home office expenses from my income taxes, albeit only under certain circumstances, during my three years working from home as a permanent employee.

It would make up somewhat for my suffering, I told myself, when I was banned from enjoying the odd fag, my weekend chenin blanc and my fat Friday pizza delivery, during hard lockdown.

I told myself: “With a juicier tax rebate, you may enjoy something more luxurious and expensive during your free time, like a Babylonstoren or Rocky Patel, with the dinner planned at Marble Restaurant in Rosebank.

But with the ink hardly dry on my recently submitted tax return, and my house about to be sold to make a move to Cape Town, my tax consultant broke the bad news, telling me that if part of my home was used as a home office in the tax period under review, that part is considered to “taint” the primary residence exclusion for capital gains purposes. What that means, in layman terms, is that capital gains tax exclusion afforded on a primary residence (the residence in which the home seller lives) of up to R2 million, will now be a lot less, as part of my residence is now considered an “official office space”, and should be treated as such from a tax perspective.

Now let’s say, and this is purely hypothetical, and an example underwritten by Tax Tim, I purchased my home in February 2010 for R1 200 000. In February 2018, I carried out renovations to add on an extra bedroom and spent R300 000 to convert it into a study.

The office space made up approximately 10% of my total house space (ie, it was 10m², while my entire home was 100m²) and I therefore claimed 10% of the house running costs as a tax deduction against my “business” income. I lived in this home until February 2022 when it was sold for R3 500 000. The taxable income for 2022 was R500 000. In this situation, the Tax Act requires the capital gain to be apportioned between primary residence use and business use.

This apportionment must take into account two factors:

¡ The length of time that the home office was used as a portion of the entire period of ownership (four years out of 12 years in our example).

¡ Size of the home office compared to the size of the entire property (10% in our example).

So the calculation goes like this: Capital Gain (proceeds – less base cost): R3 500 000 – R1 500 000 = R2 000 000 – apportionment for period (4 years) during which home was partially used (10%) for home office purposes (R2 000 000 X 4/12 X 10% = R66 666).

Portion of the capital gain attributable to the property’s use as a primary residence: R2 000 000 – R66 666 = R1 933 334. Total Capital Gain: R66 666 – annual capital gain exclusion R40 000 = R26 666.

The inclusion rate for capital gains is 40% for individuals. This means that 40% of the gain (ie, R26 666 X 40% = R10 666) will then be added to my taxable income and will be taxed at the marginal rate of tax.

If we assume my marginal tax rate is 36%, then approximately R3 840 capital gains tax will be payable (ie, R10 666 X 36%).

And that is worth two, almost three dinners at Marble. Just to remind myself: If I had not used part of my house as a home office, then the capital gains tax on the disposal of my property would have been zero.

I still need to compare this hypothetical capital gains tax (R3 840) with my annual tax saving as my conveyancer and tax consultant are two different people, and the sale is yet to be concluded, but the point is before you are too hasty with the home office deductions, if your house is or was on the market during this last or current tax year, you need to be 100% sure which is more advantageous from a tax perspective.

It seems likely that it was still worth it for me to claim home office expenditure annually and the tax benefits would outweigh the capital gains tax I would need to pay on disposal. But this is me, and only a hypothetical.

So for people as eager as me to claim the home office tax deduction in order to reduce their taxable income (and ultimate tax liability), it’s important to understand that claiming this expense may increase capital gains tax, you will need to pay on your property when you dispose of it one day. Don’t say I didn’t warn you.