Second property: be aware of tax implications

Last updated on 12th December, 2017 at 05:06 pm

As attractive as it may seem to own a second property – as a holiday home, an investment (to let) or for speculation – buyers and owners should be aware of the tax implications and how it could affect them.

In terms of the tax payable on capital gains, rental income and estate duty, buyers of a second property should also know that the registration of a second property – whether in a trust, a company or in their own or spouse’s name – will also come into play.

Transfer duty

When buying a second property, one has to bear in mind that, like in the case of your primary residence, transfer duty will be payable.

Transfer duty is a tax levied in terms of the Transfer Duty Act, No. 40 of 1949, on the value of any property which is acquired by way of a transaction or otherwise. It is payable by the person acquiring the property within six months of the date of acquisition. If the transfer duty is not paid within this period, interest calculated at 10% per annum for each completed month will be payable.

Capital gains tax

Should you decide to sell your second property and make a hefty profit to boot, capital gains tax (CGT) may hit you hard as no exemption applies on the capital gain realised from the sale of a person’s second home or holiday home.

One way for a seller to determine the capital gain made in a transaction, in simple terms, is to deduct the base cost of the property from the amount that the property was sold for. The base cost is determined by combining the original price the seller paid for the home, along with all costs incurred during the buying and selling of the property, eg renovation costs, transfer costs and duties, attorney fees, agent’s commission, etc (provided these costs were not claimed as expenses against rental income during previous years).

Once this base cost of the property has been determined, it is then possible for the SA Revenue Services (SARS) to calculate the CGT to be paid based on the net profit realised.

Alternatively, the seller himself can determine the CGT payable and include the amount as taxable income in his assessment. SARS, however, reserves the right to ask an independent valuator to determine whether the transaction, and thus the CGT, is realistic.

Letting

Likewise, a person owning a second property which he initially let out but later occupied himself before selling it at a later date, is liable for capital gains tax for the period that he let out the residence.

Assuming the owner let out the property from 1 October 2005 to 30 September 2010 (five years) and then lived in the residence for another five years until 30 September 2015 before selling it, he will be liable for capital gains tax on half of the overall capital gain on the disposal of the residence. The other half of the overall capital gain will qualify for the primary residence exclusion.

Estate duty

Also bear in mind that estate duty is payable on the estate of every person who dies and whose net estate is in excess of R3.5-million. It is charged at the rate of 20%.

An estate consists of all property of a deceased resident, movable as well as immovable – including deemed property, such as life-insurance policies – whether situated in or outside of South Africa. Estate duty is due within one (1) year of date of death or 30 days from date of assessment, if assessment is issued within one (1) year of date of death.

To ensure that you are familiar with all the tax implications regarding a second property, it is advisable to consult a qualified tax adviser.

By Wilma de Bruin