WORDS: ANNE SCHAUFFER IMAGES: SHUTTERSTOCK
You know why you’re buying a second property, but it’s as important to quiz yourself about the ﬁner details as it is about any small print.
Your costs in terms of raising and registering a bond, transfer costs, and agents commission is going to be precisely the same as when you bought your primary property. But unlike your primary property purchase, there are other considerations.
According to Hayden Giger, channel management head, FNB Private Bank lending, ﬁnancial implications of buying a second home can be broken down into two types of cost: contractual and variable. “Contractual will be the monthly bond payment (if ﬁnanced), rates, taxes, levies (if sectional title), water, and lights. Other costs will be normal maintenance and security costs, as you would incur on your primary residence.”
Giger suggests a few points which homeowners about to make that second purchase, need to take into consideration:
- You need to consider where you want to buy and what type of property, in other words, freehold or sectional title. That’s an extremely important consideration, as it will have an impact on your monthly contractual and variable costs.
- The proximity to your primary residence also has an impact on your ﬁnancial obligation, especially if it’s a rental property – for example, will you be able to manage it, or will you place its management in the hands of agents?
- What do you want to do with the property, that is, holiday home for your own exclusive use, or rental property? Then consideration needs to be whether it’s a long-term rental or short-term like an AirBnB. With each choice a different set of considerations would need to be taken into account.
- You need to look at the purchase as an investment, and decide if the investment is to be weighted to capital gain over time, or an annual yield via rental.
- Taking all the above into account, advice should be sought as to the type of ownership vehicle in which the property should be bought. Should it be in your personal name, in a trust, or another vehicle? Numerous factors impact on that.
Capital gains tax (CGT)
David Campbell, Meumann White Attorneys, says, “In terms of section 26A of the Income Tax Act, the taxable capital gain of a person in a year of assessment is included in his taxable income and is therefore subject to normal tax.
“CGT applies to individuals, trusts and companies, and both South African residents and non-residents are subject to it. If the disposal or deemed disposal of an asset (for example, sale of a property) took place during the year of assessment, the capital gain or loss should be calculated as: proceeds less base cost equals capital gain/loss.”
In the case of a natural person or special trust, the ﬁrst R2m of the gain on the sale of a primary residence is exempt from CGT. Not so, a second property. “If a person has a net capital gain, it must then be multiplied by the inclusion rate applicable to the said person, and the result is then included in the normal taxable income. As an individual, the capital gains tax rate is 40%, and the effective maximum rates of tax payable on capital gains (2018/19 tax year), is 18%. The annual exclusion for an individual, is R40,000,” Campbell explains.
“Remember, the taxpayer bears the onus of establishing the base cost of the asset. If unable to do this, the base cost will be deemed to be R0 (or as much as can be established). It’s therefore essential that the taxpayer retains all documentation that veriﬁes expenditure incurred by him,” Campbell says.