Understanding Property Taxes: A Guide for Buyers and Sellers
Whether you're purchasing property for personal use or investment, it's crucial to understand the various taxes you'll encounter throughout your ownership.
"Property buyers, especially those entering the market for the first time, should be mindful of their tax responsibilities and plan their investments accordingly.
Tax considerations are often overlooked, so here’s a breakdown of the essentials for both buyers and sellers.
When You Purchase
When acquiring a property, you will either be liable for VAT or transfer duty—never both.
VAT applies when a VAT-registered business sells a property, such as in the case of new residential developments. On the other hand, transfer duty is payable when buying an existing residential property from an individual owner.
It’s important to note that transfer duty usually cannot be included in your home loan, meaning you’ll need to cover this cost out-of-pocket. For higher-value properties, this could amount to hundreds of thousands.
"In the case of new properties, VAT is included in the purchase price, which means it’s covered by your home loan," Kriek explains. "This can make new properties more affordable for first-time buyers."
When comparing property prices, keep in mind that new properties can be less expensive than older ones at the same advertised price due to the absence of transfer duty.
Throughout Ownership
As soon as you take ownership, you’ll begin paying municipal rates and taxes. Unlike VAT and transfer duty, which go to SARS, municipal taxes fund local services, infrastructure, and public salaries.
"When planning your purchase, consider how these municipal taxes will affect your monthly budget," Kriek advises. "We’ve had clients who were caught off guard by the additional monthly tax bill on their new homes. This municipal tax is separate from utility charges and other costs like levies to the body corporate or homeowners' association."
When You Sell
Selling your property will involve paying capital gains tax (CGT), which can be a bit tricky.
CGT is based on the difference between your purchase price and selling price. For individuals, 40% of this profit is taxed at your marginal tax rate when filing your annual return with SARS.
However, if the property is your primary residence, the first R2 million of your profit is exempt from CGT.
There are exceptions, though. For example, if you rented out the property before moving in permanently, the R2 million exemption is proportionately divided between the rental period and your time living there. The portion related to the rental period won’t qualify for the exemption.
Additionally, if you claimed a business deduction for using part of the property as a home office, that portion of the property won’t benefit from the tax-free allowance.
Trusts and companies are taxed on 80% of their capital gains and do not receive the primary residence exemption. This provides a disincentive to hold your primary residence in an entity, although estate duty and estate administration costs should also be considered.
Secondary properties, like a holiday home, don’t qualify for the primary residence exemption either, even if you live there part-time.
Upon Passing
When you pass away, your estate will be liable for estate duty on any value above R3.5 million, handled by your estate administrator.
At this time, any property sold will also attract CGT, applying the same exclusion allowance for a primary residence.
If your estate lacks sufficient funds to cover debts and taxes, your property may need to be sold to generate the necessary funds.
There are strategies to safeguard your property against this scenario. For instance, taking out additional life insurance to cover tax liabilities, or transferring the property to an estate planning vehicle like a trust or company at the earliest opportunity, can help minimize future tax burdens.
While CGT will be payable on the profit from this sale, any future appreciation in property value will belong to the entity, not your estate, potentially reducing estate tax liabilities over time. Trusts and companies don't pass away, so CGT can be avoided indefinitely, benefiting your heirs.
When Earning Income
If you generate income outside of employment, such as through rental property, you must pay provisional tax.
Provisional tax requires estimating your non-employment income for the year, with half of the tax due at the end of August and the balance at the end of February. Any provisional tax paid is deducted from your total assessed tax when you file your annual return.
"Estimating your annual earnings can be stressful, and it’s often best to consult a professional tax advisor or accountant.
Starting Off Right
Given the complexity of property taxes, it's impossible to cover all the details in one article.
For this reason, it’s essential to plan your property purchases with both financing and tax in mind. "If you're dealing with high-value properties or have a total property portfolio exceeding R2 million, it’s wise to seek advice from estate management and tax planning professionals.
