How to calculate Capital Gains Tax when using part of your primary residence for business purposes
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A business owner or professional person often uses part of his or her primary residence for business (non-residential) purposes. When the residence is sold, a special Capital Gains Tax (CGT) treatment applies.
The CGT rules allow up to R1.5 million of the capital gain made on the disposal of a primary residence to be disregarded. As a separate concession, if that residence is sold for R2 million or less, the full capital gain is disregarded, unless that residence was used partly for business use for any period of time after 1 October 2001 (when CGT started), in which case the R2m concession does not apply at all.
If part of the residence was used for business purposes for any period of time after 1 October 2001, then the capital gain must be apportioned between residential and business use. The residential portion will enjoy the R1.5m exemption, and the business portion won’t.
For example, a business or professional person buys a residence for R600 000 and uses 35% of its floor area to run a business throughout the period of ownership. The house is then sold for R2 650 000.
The capital gain is therefore: R2 650 000 – R600 000 = R2 050 000.
35% x R2 050 000 = R717 500 (business use) and
65% x R2 050 000 = R1 332 500 (residential use)
The capital gain of R717 500 attributable to business use does not enjoy the rebate of R1.5m and must be disclosed in full on the income tax return for the tax year during which the residence is sold. SARS will subtract the annual exclusion and the remainder is included in taxable income at the relevant inclusion rate, which for a natural person and special trust is 33.3% and for others is 66.7%. This net included amount will be taxed at the taxpayer’s relevant marginal rate of tax.
The capital gain of R1 332 500 attributable to residential use does enjoy the rebate.
Thus, R1 332 500 – R1 500 000 = 0.
In the above example the house was used throughout the period of ownership for dual purposes. But if the dual purpose use endures for only part of the period of ownership, an initial calculation must be done to apportion the gain according to how long the house was used for a single purpose (i.e. exclusively for residential purposes) and for how long it was used for dual purposes. Let’s use the same facts as above, but for this second example assume that for 40% of the time the use was single purpose (residential) and for 60% of the time the use was dual purpose (being 35% business and 65% residential).
The overall gain of R2 050 000 must first be apportioned:
60% x R2 050 000= R1 230 000 (dual purpose use)
40% x R2 050 000 = R820 000 (single purpose, namely residential use)
The dual purpose use apportionment figure must then be further apportioned according to the floor area used for each type of use:
35% x R1 230 000 = R430 500 (business) (declarable business gain)
65% x R1 230 000 = R799 500 (residential)
The two residential gains must be added together:
R820 000 + R799 000 = R1 619 500 (total residential gain)
Check that all gains are accounted for: R1 619 500 + R430 500 = R2 050 000 (total gain).
Subtract the rebate from the total residential gain:
R1 619 500 – R1 500 000 = R119 500 (net declarable residential gain)
Add the two net declarable gains together: R430 500 + R119 500 = R550 000. From this figure SARS will subtract the annual exclusion and the remainder will be included in taxable income at the relevant inclusion rate.
There are a number of other permutations which may apply, for example, when the house has not been occupied by its owner for a period. Again, an apportionment has to be made to compensate for this. Furthermore, the CGT rules grant relief when the house is rented out for a period not exceeding 5 years.
It is important that a business or professional person is aware of the existence of these complexities and seeks expert CGT advice when a sale of the dual-use residence is anticipated.
Article written by Clive Hill, Legal Adviser, Sanlam Trust
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