Primary Residence Exclusion
08 August 2013
Posted by: Author: ENS
Author: ENS (Integritax July edition)
Is it true that globally mobile employees can sell their homes and not pay capital gains tax even if they rented it out for a number of years?
It is true in most cases. The general rule is that when you sell your home, the capital gain realised on the sale is excluded from capital gains tax up to a limit. Based on the Income Tax Act No. 58 of 1962 (the Act), you will pay no capital gains tax on the first R2,000,000 you make when you sell your home. There are, however, some restrictions on this exclusion.
In order for the sale to be excluded, the home must be considered a primary residence based on income tax rules. These rules state that you must have used the home as your "primary residence”. Suppose that you are a globally mobile employee and invest in a new home in South Africa. You live in it for the first year, get a foreign assignment and rent the home for the next three years and, when the tenants move out, you move back in for another year. At the end of this five-year period, you sell your home.
How do you work out your capital gains tax liability? You used the property as your primary residence for two of the five years. Applying the primary residence test your capital gains tax exclusion should only apply to those two years. Actually no, you may be able to sell the residence and not pay any capital gains tax at all. How is this achieved?
First, you must ensure that during the three year rental period you were either temporarily absent from South Africa or you were employed at a location further than 250 kilometres from the residence. Second, you must have resided in the home for a period of 1 year before and a period of one year after the rental period. Third, no other residence became your primary residence during the three year rental period. Fourth, and lastly, your period of absence from your home must not have exceeded five years.
If you satisfy all these requirements then you will be treated as having used the home for domestic purposes during your period of absence even if you were renting it out during that time. This means that you will be able to claim the capital gains tax exclusion in full and not only for the two years that you actually stayed in the home.