CGT – How does the primary residence exclusion work?

Taxation on private residences and property has always been a contentious issue. While profits made on the disposal of primary residences have not been fully excluded from the CGT net, limited relief is provided for in the CGT legislation.

This article deals with the rules governing capital gains and losses on the disposal of primary residences.

Introduction

CGT on the sale of private residences is often heavily criticised. It has also been labelled by certain critics as an immortal tax, being a tax on inflation with no regard to the fact that the asset has to be replaced by similar assets subject to the same inflationary impact.

Be it as it may, capital gains on the disposal of primary residences are included in the CGT net. Relief is provided in the form of a special exclusion.

What constitutes a primary residence?

A primary residence for CGT purposes is essentially a residence in which a natural person resides and used mainly for domestic purposes. In short, it is the house where you and I live.

The catch is that only one residence can be a primary residence for CGT purposes. If you therefore own more than one residence where you reside from time to time, you need to determine which of the two residences is your primary residence.

What about temporary absence from the residence?

The CGT legislation makes provision for circumstances where a person may temporarily not be occupying his or her primary residence without the residence losing its status as a primary residence.

If a person for a maximum period of two years does not occupy the primary residence, the property will still be regarded as a primary residence if a primary residence has been vacated to be sold due to the acquisition or intended acquisition of a new primary residence, the residence was constructed on land intended for the construction of a primary residence, the residence had been accidentally rendered inhabitable or the death of a person.

After the expiry of the two-year period, the property will lose its status as a primary residence.

What about property used partially for business purposes?

Where a property is partially used for business purposes (such use must be less than 50%), the exclusion from capital gains will only apply to the extent that the property is not used for business purposes.

The extent of the use of the property for non-qualifying purposes must be determined with regards to the entire period that the property was held since the introduction of CGT.

The determination is accordingly not made based on the use of the property on the date of disposal. Discontinuing non-qualifying activities immediately before the sale of the property will accordingly not assist to avoid a reduction in the extent of the exclusion from CGT gains.

In the COVID-19 and post COVID-19 period careful consideration should be given to the impact of the above on the extent of the exclusion available on the disposal of primary residences where businesses or functions of businesses are conducted from private residences.

In short, if you are claiming home office expenditure for income tax purposes, your primary residence is probably already compromised.

What is the exclusion?

The first R2 million of any capital gain or loss incurred on the disposal of a primary residence is excluded from the CGT net. This means that the profit is not taxable and the loss cannot be offset against other capital gains.

The R2 million exclusion is adjusted to the extent that the property had been used for purposes other than a primary residence (see above).

Summary

In this article we dealt with the special exclusion from capital gains and losses in relation to primary residences. In the final article in this series of articles we shall deal with other exclusions and exemptions.