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Buy investment property and pay the least possible Capital Gains Tax

by , 18 June 2015
Many people believe an investment property is a safe haven to put away some money for the future.

But when you sell an investment property you could be liable to pay Capital Gains Tax (CGT).

If you don't plan it properly, the CGT you'll have to pay on your investment property could be very high. And it would defeat the purpose of making money.

That's why I'm writing to you today. Read on to find out how you can calculate CGT and the most efficient way to buy investment property without paying a cent more of CGT than you have to!

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Three methods you could use to buy investment property 
 
Before I tell you what the three methods are, let's quickly recap on how to calculate CGT.
 
Capital gain = selling price – the base cost.
NB: The base cost is the cost price + bond registration fees + transfer fees + any improvements + selling cost.
 
If the property costs more than R2 million, and it was your primary residence you'll be very happy to know that you'll get a primary residence exclusion of R2 million from SARS when selling it. But what if it's not your primary residence and you have to calculate and pay CGT?
Here's what you must do…
 
Method #1: Buying in your personal capacity (sole proprietor)
 
Let's look at the example of John. He works in Sandton as an accountant and earns more than R900 000 for the 2015 tax year from his employer. He's in the highest tax bracket at a marginal rate of 40%.  
 
He owns a house near Johannesburg city centre which he bought in his personal capacity during 2009 for R2 million. Now he's selling it and receives R3.5 million for it in 2015.
 
Let's look at his CGT implications.
 
SARS rates for CGT in your personal capacity:
·         Inclusion rate = 33.33% of the capital gain;
·         Maximum effective  rate is 40% x 33.33% = 13.33%; and 
·         Annual exclusion for capital gain is R30 000.
 
What does all of this mean?
John needs to apply these rates to work out the capital gain. In his case it's his selling price of R3.5 million less R2 million (the base cost) = R1.5 million.
 
Now he needs to work out the capital gains tax on the R1.5 million.
 
He'll need to include R499 950 as capital gains with his taxable income for the 2014 tax year. This he gets from multiplying R1.5 million x 33.33%.
 
Then he multiplies this capital gain by 40% because he's a taxpayer with a total income for the tax year which falls in the highest tax bracket. He'll also have an annual exclusion of R30 000 available which he can use.
 
So capital gains tax payable by John on the investment property sold will be
(R499 950 – 30 000) x 40% = R187 980.
 
Read on for two more methods to buy an investment property by means of a trust or company and the CGT consequences.

 
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Method #2: Buying as a company
 
Suppose John buys and sells the house under his company. The rates below from SARS show that John's CGT rate is higher when selling a property in a company than in his personal name. Let's work it out:
 
·         Inclusion rate = 66.6%;
·         Maximum effective  rate is 28% x 66.6% = 18.67%; and 
·         Note: There's no exclusion available!
 
He works this out as follows:
 
R1.5 million x 66.6% = R999 000.
 
So capital gains tax payable by John on the investment property sold will be R999 000 x 28% = R279 720.
 
Method #3: Buying as a Trust
 
The rates below from SARS show that John's CGT rate is higher when selling a property in a trust than in a company or in his personal name.
 
·         Inclusion rate = 66.6%;
·         Maximum effective rate is 40% x 66.6%= 26.67%; and 
·         Note: There's no exclusion available!
 
He works this out as follows:
 
R1.5 million x 66.6% = R999 000.
 
So capital gains tax payable by John on the investment property sold will be R999 000 x 40% = R399 600.
 
Looking at the above, it could be more lucrative to buy investment property in your personal capacity. The CGT implications could be a lot less looking at the effective tax rates.
 
But, remember that a company and Trust are both a separate legal entity to you. This could be a safer option when you consider the impact of death and the consequences of estate duty tax.
 
There you have it, now you can buy an investment property and pay the least CGT.
 
P.S. Turn to chapter C02: Capital Investments in your Practical Accountancy loose leaf now for effective methods you can use to correctly evaluate your capital investments. Don't have one? Simply follow this link and increase your company's cash flow today.
 
 


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