Tax season: Home office claims and Capital Gains Tax

The South African Revenue Service (SARS) explains: “When a part of your home is used as a home office, that part is considered to ‘taint’ the primary residence exclusion for CGT purposes.”

This means that when the home is sold, the overall capital gain or loss will need to be split between the “tainted and untainted elements”.

What is CGT and how does it work?

CGT came into being in October 2001 and forms part of income tax calculations for individuals, companies and trusts.

For individuals, this mostly comes into play when fixed property or business shareholdings are sold. Sales of personal use items such as vehicles, jewellery, interest-bearing investments and collectables typically do not apply; however, it does apply to bullion such as gold coins, foreign currency and cryptocurrency.

In simple transactions the capital gain or loss is calculated as follows:

Sale price – (base cost + improvement costs + qualifying fees) = capital gain/loss

SARS does not tax you on the full profit of the sale. In fact, to work out the actual CGT you then multiply your capital gain/loss by the inclusion rate (40% for individuals) and your personal tax rate relative to your income.

Capital gain/loss x 40% inclusion rate x personal tax rate = CGT

CGT on fixed property

If the property you’ve sold is the home that you primarily lived in, SARS applies exclusions which lowers your tax burden.

Currently, SARS provides a R2 million ‘primary residence exclusion’ which is deducted from profit on the sale before the tax is calculated. This means the first R2 million profit from the sale of your home is exempt from tax.

This exclusion does not apply when selling an investment property such as a holiday home or property you were renting out.

CGT and home office expenses

If you are using a portion of your home for trade or work, then this changes the CGT treatment at the time of sale.

SARS explains that this portion of the home does not apply for the primary residence exclusion. Therefore, the capital gain must be proportionally divided between the residence and the trade area. The trade portion is not eligible for the exclusion and is treated in the same way as an investment property. As such, the sale of a property that has previously seen home office expenses claimed, will attract higher CGT.

Given that home loan payments are not claimable as a home office expense – unlike rent – it is a good idea for homeowners to discuss claiming home office expenses with a tax specialist who can advise on the best way forward.