This week the panel considers the tax and other financial implications of selling a property that is not your primary residence.
The question comes from a reader who has been renting out such a property for a decade and now wishes to sell it. He has obtained a valuation but is uncertain as to what the costs will be on his side.
The reader asks firstly about the tax situation and secondly about the recommended commission payable to an estate agent with a sole mandate to sell the property.
The second question is the more difficult one to answer, says Grant Berndt from Abdo & Abdo Attorneys in East London.
“This is a very negotiable aspect of the agreement between seller and estate agent and is affected by various aspects.”
As long as the parties are clear as to what their expectations are, says Berndt, both are free to accept or refuse the specific negotiated terms of the mandate, including the commission scale.
“Factors to consider include the selling price of the property and the ease with which it may be sold. The parties could also agree to a fixed commission sum.”
Berndt says the more non-negotiable aspect of the sale relates to the tax implications, as the disposal of certain assets has been subject to capital gains tax (CGT) since October 1, 2001.
“In other words, the growth in value of an asset is taxed when the asset is sold or disposed of in another way.”
Berndt says the starting value from which the growth is taxed is called the base cost and one of its main components is the value of the asset at the above-mentioned date.
“In terms of the provisions of the Income Tax Act relating to CGT, this value could have been determined by a valuation done within a specified period, or by using a formula called the Time Apportioned Base Cost.”
Once the base cost has been determined and the selling price set, the owner can get an idea of the potential tax payable, says Brian Kinnear, principal of Fresh Lifestyle Properties in East London.
“CGT is not a tax in itself. Instead, a portion of the gain realised when disposing of the asset is included in your normal income tax calculation.”
Kinnear says this means that 25 per cent of any gain is included with your other taxable income and is taxed along the normal marginal rates. Before this is calculated, the net capital gains or losses are reduced by R20 000 based on an annual exclusion allowed by the Act.
“This only applies however if you are a so-called ‘natural person’ and not a ‘juristic person’ such as a company, trust or close corporation. For such entities, 50 per cent of the gain is taxable.”
According to Kinnear, the other implication of this system of tax is that the CGT due is not necessarily payable at the same time that the property is sold. “The taxpayer will account for the transaction only at the end of the tax year.”
For individuals, the tax year ends on February 28, says Kinnear, therefore, should the property be sold during April for instance, the tax will only become payable the following year.
“This is a very important implication if the proceeds of the sale are to be used in another transaction.”
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