Home leasing – The effect on Capital Gains Tax

The first R2 million of a capital gain or capital loss on the disposal of a primary residence, must be disregarded for capital gains tax (CGT) purposes. This means that if the proceeds regarding disposal of a primary residence are R2 million or less, the capital gain must be disregarded.

However, suppose a primary residence has been used by a taxpayer partially for purposes of carrying out a trade, such as renting it out for some of the time that they owned it. In that case, the capital gain on the sale needs to be apportioned between primary residence use and non-primary residence use. The R 2 million primary residence exclusion is only applied to the portion of the gain which relates to the primary residence.

Consequently, CGT will need to be paid on the remaining portion of the capital gain. Keep in mind that the annual exclusion may be available to utilise against the capital gain, to the extent that it has not been used against other capital gains and losses.

The apportionment must be done on a time basis with reference to the total number of months used as primary residence compared to the number of months the residence was rented out.

With the reality of COVID-19 and the accompanying economic hardships experienced in the country over the last two years, it has become increasingly common for people to rent out parts of their homes in order to earn additional income.

In these cases, similar provisions apply as set out above and the R2 million exclusion only applies to the extent that you lived in the residence yourself. Here, the apportionment is based on the proportion of the floor area used for trade (rental) and private use and must be applied to the total capital gain to arrive at a private- and a business portion of the capital gain.

In some instances, a combination of the time and area methods may have to be used, for example, when the residence was used exclusively as a primary residence for a period and then a portion of it was used for trade purposes.

How to reflect the sale in your tax return (ITR12)

In the capital gain/loss section of the opening wizard of the income tax return (ITR12), indicate that you disposed of an asset. This will open the capital gain/loss section of your ITR12.

If the property sold was your primary residence (no leasing occurred), tick the “yes” block in the section which asks this question. The full R2 million primary resident exclusion to the capital gain will be utlised.

If the property sold was not your primary residence for the full duration that you owned it, you need to report the property sale details as two separate transactions. This is done by indicating in the opening wizard that two disposals occurred. This will open two capital gains/loss sections so that you can capture the details of each transaction separately.