I already own a townhouse which I rent out and our prime property has a one-bedroom flatlet that we rent as well. I’m considering purchasing a third property in Port Elizabeth as a buy-to-let investment.
Is it worth doing this or would this push me into a high tax bracket? I would be earning around R13 900 per month. Expenses without the bond would be R3 164 per month for levies and rates. Also, how does capital gains tax work when selling the properties?
Jaco Rademeyer, from Jaco Rademeyer Estates, responds:
Considering the question, I do believe that this will increase your tax bracket. However, you have not stated what your current tax bracket is, as this will determine by how much it will increase by.
My advice would be that you determine what your taxable income will be, you need to look at which tax bracket you fall under – see SARS tax rates for individuals.
1. What exactly does CGT mean to a homeowner?
It means that taxpayers, including individuals, trusts, companies and close corporations, will be taxed on the profit they make when they sell an asset or property of a capital nature. It is therefore, basically a tax on the resale of assets. In most cases, it will not affect one’s primary residence, provided the property is smaller than two hectares and the profit to be made is less than R2 million.
However, homeowners will be liable for CGT on second properties or holiday homes that are not occupied as a primary residence.
2. How is a capital gain/loss calculated?
It is the difference between the “base cost” of the asset and the amount for which it is sold.
3. How is the “base cost” of the asset determined?
The base cost is the expenditure made to own the asset; and includes the cost of any improvements which are made to it and any other costs directly brought about by the acquisition or sale of the asset. Put another way, the base cost is the actual capital cost, plus the cost of getting the asset – for example, agent’s commission, legal fees, conveyancer fees and the cost of improving the asset. This base cost does not, however, include any expenditure that may be claimed as an income tax deduction or any borrowing costs (interest on loans) or repairs.
The taxpayer must be able to prove the base cost. It is therefore crucial for owners to keep records of any capital asset they have bought including what they spent on improving the asset. (This element of CGT has sparked a certain amount of controversy because it is felt that the effects of inflation on an asset’s base cost have not been taken into account. In South Africa this ratio is high and it is felt that increases in value could often be attributed to inflation and not to real increases in value.)
4. What is included in Capital Gains Tax?
Primary residences owned in the name of a company, close corporation or trust, individual holiday homes or second homes and properties let to tenants. Boats, aircraft and caravans. Shares, unit trusts and private investments, and second-hand policies. Krugerrands or other silver or gold minted coins
5. What percentage of CGT is payable?
For natural persons the amount is 25%. This portion of the net gain will in turn be taxed at the taxpayer’s marginal tax rate. As an effective tax rate, this means that individual taxpayers will pay a maximum effective rate of 10.5% and corporate taxpayers a maximum of 15%.
Example for natural persons would be as follows:
Natural person’s maximum marginal tax rate is 42%
Assuming the aggregate capital gain for the year of assessment is R25 000. 25% of R25 000 is R6 250, which in turn is taxed at 42% – therefore R2 625 is payable.
The R2 625 as a percentage of the original profit made is 10.5%.