Property Taxes: What Buyers and Sellers Need to Know

Whether you're purchasing property for personal use or investment purposes, taxes will be a part of your journey at different stages of ownership. It’s crucial, particularly for first-time buyers, to be informed about these tax obligations and plan their investments accordingly. Here's a breakdown of the key tax considerations when buying, owning, and selling property.

When You Buy
When purchasing a property, you’ll be subject to either VAT or transfer duty, but never both. VAT is applicable if you’re buying from a VAT-registered business, such as in the case of a new residential development. Transfer duty, on the other hand, is payable when buying an existing residential property directly from its owner.

It’s important to note that transfer duty typically can’t be financed through a home loan, meaning you’ll need to have these funds readily available. For higher-priced properties, this duty can be substantial, often running into hundreds of thousands of rands.

For new properties where VAT is usually involved, the VAT is included in the purchase price, and thus, your loan would cover it. This can make new properties more financially accessible for first-time buyers. However, it’s essential to confirm with your real estate agent whether VAT is included in the purchase price of a property, or if transfer duty applies separately, ensuring there are no surprises.

While You Own
Once the property is yours, municipal taxes will become a recurring cost. Unlike transfer duty and VAT, which are paid to SARS, municipal taxes fund local services, infrastructure, and salaries. As you plan your purchase, it’s important to account for these taxes in your monthly budget, in addition to other expenses like utility charges and levies payable to a body corporate or homeowners’ association.

When You Sell
Selling your property will trigger capital gains tax (CGT). This tax is calculated based on the profit you make from the sale—the difference between the purchase price and the selling price. Individuals are taxed on 40% of this profit at their marginal tax rate when filing their annual returns with SARS.

However, if the property is your primary residence, the first R2 million of profit is exempt from CGT. It’s important to understand a few nuances: if you previously rented out the property before making it your primary residence, the R2 million exemption must be apportioned based on the time the property was rented versus the time you lived there.

Similarly, if you claimed any deductions for business use of part of the property (such as a home office), you must adjust the exemption accordingly.

Trusts and companies, however, are taxed on 80% of their capital gains and do not benefit from the primary residence exemption. This can influence decisions about owning a property through an entity, though factors like estate duty and the costs of estate administration should also be considered. Secondary properties, like holiday homes, do not qualify for the primary residence exemption, even if they are occasionally used as a residence.

After You Pass Away
Upon your death, estate duty is payable on the value of your estate above R3.5 million. Your estate administrator will handle this, and any property sold during this process will incur CGT, with the primary residence exemption still applicable.

If your estate lacks sufficient funds to cover debts or tax obligations, the property may need to be sold to raise the necessary cash. To avoid this, you could consider options like taking out extra life insurance or selling the property to a trust or company early on. Although you’ll pay CGT on the sale, any future increase in property value would be on the entity's balance sheet, not yours, thus reducing your estate's tax liability over time. Trusts and companies don’t die, so you can defer CGT indefinitely, benefiting your heirs.

If You Earn Income
If you earn income from renting out your property, you’re required to pay provisional tax. This involves estimating your non-employment income for the year and paying tax on half of those earnings in August, with the remainder due in February. When filing your annual tax return, any provisional tax already paid is credited against your total tax liability.

Given the complexities of property tax, it’s advisable to consult with a professional tax advisor or accountant, especially when navigating sales or purchases.

Planning Ahead
The complexities of property taxes and the various strategies to manage them are too broad to cover comprehensively in a single article. Therefore, it’s vital to plan your property investments carefully, considering both financing and tax implications. For high-value properties, such as those exceeding R2 million, seeking professional estate management and tax planning advice is essential.