Most people are familiar with the saying, “Only two things in life are certain, death and taxes.” However, the thought of navigating the tax process when purchasing property need not strike fear into you. Whether you are looking at buying your first home, an investment property or business premises we demystify the tax types and their implications.
Mike Greeff, CEO of Greeff Christie’s International Real Estate offers some advice on the subject, “Buying property is a life altering decision for anyone and any legislative oversights could prove very costly. Always enlist a reputable real estate partner to assist with the process. A reliable, experienced agent will be able to guide you through the process and will be familiar with the documentation that is required.”
As a first-time buyer your biggest expense secondary to the cost of your home is the transfer duty that applies to it. A transfer duty is payable by the buyer on an immovable asset. The duty payable is proportional to the value of the asset being transferred and is implemented on a sliding scale. As per the 2017 budget, individuals buying property that costs less than R900 000 are exempt from paying a transfer duty. Properties ranging between R900 001 and R1.25 million attract a 3% duty on the value above R900 001 while properties priced between R1 250 001 and R1 750 000 will cost R10 500 plus 6% of the value exceeding R1.25 million. Properties priced from R1 750 001 to R2 250 000 will cost R40 500 plus 8% of the value exceeding R1 750 000.
Homes priced R2 250 001 to R10 million will pay R80 500 plus 11% of the value above R2 250 000, while homes priced from R10 000 001 and above will pay R933 000, as well as 13% of the value exceeding R10 million. If your intended property is valued at R2.65 million it falls into the R80 500 plus 11% category.
This means that you will pay R80 500 plus 11% of the value over R2.25 million (which in this instance means 11% of R400 000.) The total transfer duty therefore payable on your future home is R80 500 + R 44 000 = R 124 500. Companies that purchase immovable property will have to pay transfer duty at the same rate as individuals.
The good news is that no transfer duty is payable by the seller if they are registered for VAT and the property being transferred forms part of the business operations for which the seller is registered.
Capital Gains Tax
Buyers are not the only one’s subject to taxes during the property transfer process, sellers are sometimes liable for a Capital Gains Tax to the South African Revenue Service. Capital Gains Tax is in essence a tax placed on the profits gained from the resale of assets.
There is an exemption allowed to sellers if the property being sold is being used as their primary residence. (Not a holiday home, rental or investment property.)
The government considers the first R2 million profit gained on the sale of a primary home as CGT exempt. Capital gains tax is based on the income (from all sources) that individuals receive during the financial year. In addition to the once off primary residence exclusion of R2 million, individuals also benefit from an annual R40 000 capital gains tax exclusion.
Sellers who use their home for business purposes will pay capital gains tax proportionate to the percent of the property being used for business purposes. The property must, by law, be used for more than 50% domestic use, failing which, the exclusion will fall away completely, and the sale will be taxed according to the business scale.
A sound understanding of transfer duties as well as capital gains tax laws could result in significant savings during the sales process. Always seek professional assistance when buying or selling property as their experience and knowledge could save you money.