There are four capacities within which it is possible to buy property and each has its own distinct advantages and disadvantages. The options available are to either purchase in your individual capacity, through a trust instrument or in the name of a company or a closed corporation.
Here we will look at the advantages and disadvantages of purchasing property in one’s personal capacity. For further reading, we have outlined the pros and cons of buying property in a Trust here or buying through a legal entity here.
Determine WHY you are buying the property
From the outset, it is important to know why you are buying the property.
- Will it be used as your primary residence?
- Is this property going to be your family’s holiday home?
- Will you be running your business from the property?
All these factors have different tax and legal implications. it is therefore highly advisable to consult your attorney and tax specialist to assist in deciding which would be the best option for you.
Paying transfer duty
As an individual purchasing property in your own name, you are liable to pay transfer duty, which is calculated according to a sliding scale. Properties valued at R1-million or under will be exempt from paying Transfer Duty. The Transfer Duty Act makes provision for various other Transfer Duty exemptions in respect of individuals as well.
When Capital Gains Tax is applicable
Should property be sold for an amount in excess of its original purchase price (less all capital improvements), then the gain may be subject to Capital Gain Tax (CGT).
The capital gain is the difference between the base cost (dependent on whether property was acquired before or after October 2001) of the property and the selling price – in other words the profit.
In the event that the owner is a natural person as defined in the Income Tax Act, and the property is your primary residence, then the first R2-million of the profit made on the disposal of your property is exempt from CGT.
CGT is not a flat rate. A portion of your capital gain gets added to your other income for that tax year and you’re taxed in your applicable tax bracket. The CGT rate can range from 7.2% to 18% depending on the tax bracket you’re in.
The R2-million rand exemption does not apply to second/subsequent properties.
Property audits not applicable
Another advantage is that should the property be purchased in an individual’s personal name, the property does not have to be audited, so administrative costs are reduced significantly.
The risks associated with purchasing property in a personal capacity
There are certain risks to personally purchasing property:
- In the event that an individual is self‐employed, running a business from home, and subsequently declared insolvent, that property, as well as any other property in the individual’s name, will not be protected from creditors.
- Upon the death of the individual, the property will form part of the individual’s estate and be subject Estate Duty.
In conclusion, consider your long-term purchase wisely
It is therefore of utmost importance to carefully consider the long term use of the property and your reasons for purchasing the property. Should you have any queries, please contact our experienced Conveyancing and Property Law team.
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The articles on these web pages are provided for general information purposes only. Whilst care has been taken to ensure accuracy, the content provided is not intended to stand alone as legal advice. Always consult a suitably qualified attorney on any specific legal problem or matter.