I recently got a call from a gentleman with an interesting financial planning question, so I thought we’d tackle it today before I completely forgot about it.
You see this gentleman’s son had bought a property in October 2009 for R900, 000. Subsequently he (the son) had made R100, 000 worth of improvements to the property.
In January 2011 he agreed to sell the property in a private deal to his dad for R1, 100, 000.
For some or other reason not known to me, the property is still owned in the name of the son, with the father as tenant, but now the father wants to transfer ownership as of March 2012.
A tax consultant has told the son that there will be a capital gains tax implication for him upon doing this.
I immediately queried this because of the primary residence exclusion applicable to individuals and special trusts. Turns out that the son had moved out of the property in September of 2011, which meant that the home did not qualify for the primary residence exclusion any longer!
Ordinarily, this would mean a capital gain of R100, 000 less the R30, 000 exclusion available to all individuals and special trusts multiplied by the inclusion rate of 33, 33%. R23, 331 would be added to the sons taxable income for capital gains tax purposes in 2012.
But hang on a moment, could the tax consultant have made a mistake?
You see, for 2 years the property had been occupied as a primary residence by the son.
Surely this had to count for something? And indeed it does…
What the tax consultant hadn’t considered was that the capital gain has to be apportioned between the period when the son was resident, and the period when he was not resident.
So let’s look at this scenario again. The son had bought the property in October of 2009 and moved out of the property in September 2011.
That means he lived there for 24 months…
- October 2009 to December 2009 – 3 months
- January 2010 to December 2010 – 12 months
- January 2011 to September 2011 – 9 months
As of March 2012, the property is still in his name, which means that he owned the property for 30 months…
- October 2011 to March 2012 – 6 months
Now we need to apportion the R100, 000 capital gains to the period where the son was not resident in the property as follows:
- Period when the son was resident (24/30 x R100, 000) = R80, 000.
- Period when the son was not resident (6/30 x R100, 000) = R20, 000
R20, 000 less the R30, 000 annual exclusion means that the capital gain would not be taxed at all.
Ain’t that good news!
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Until next time.
The InsuranceFundi Team