Don't Ask the Braai: Capital Gains Tax, Company or Own Name?
TL;DR: Capital gains tax on property works differently for individuals and companies in South Africa. On a straight gain, an individual is generally taxed less than a company. The company's advantages lie elsewhere: the finance ceiling, the ring-fence and scale. Ask your accountant four questions before deciding whose name a property goes in.
Okay, so here are four questions to ask your accountant before you decide whose name a property goes in. Most people ask none.
They ask a mate at the braai. Or a Facebook group. Or the agent selling the property. And then they make a twenty-year decision on a one-line opinion.
How does capital gains tax on property work?
When you sell a property for more than its base cost, the difference is a capital gain. Capital gains tax isn't a separate tax. A portion of the gain is added to your taxable income for the year and taxed along with everything else.
The portion that gets included, and the rate it's then taxed at, depend on who the seller is. An individual and a company are treated differently.
I'm deliberately not putting rates or percentages here. They change in budgets, and a number in a blog isn't advice. SARS publishes the current ones, and your practitioner will apply them to your figures.
For the record, CGT is a nice problem to have, because it means there was a gain. My first property, in Amsterdam, lost over €14,000. Not a strategy I'd recommend.
Is capital gains tax lower in your own name or in a company?
On a straight capital gain, an individual is generally taxed less than a company.
I say that plainly because most people selling company structures won't. Individuals get a smaller portion of the gain included and an annual exclusion. The home you live in gets its own exclusion on top. A company gets neither of those exclusions, and money taken out of a company as a dividend is taxed again on the way out.
So if the only thing you care about is the tax on selling one property one day, your own name often wins.
Step one is the company. The Directors Fortress gives you the blueprint and the investor-friendly offer to purchase. R99 once off. Start here
Ja, so then why do investors use companies?
Because selling one property one day isn't the plan.
The company wins on three things that have nothing to do with the capital gains calculation.
The ceiling. In your own name, every bond sits on your payslip. Inside a company, the bank also weighs what the property earns.
The ring-fence. A claim from a tenant or contractor lands on the company that owns the property, not on you personally. Except for what you sign surety for.
Scale. Profit can stay inside the company to fund the next purchase.
That's the honest case. It doesn't need a tax promise attached.
Four questions to ask your accountant
1. Am I holding this long-term or selling it soon?
Buy-to-hold and buy-to-sell aren't taxed the same way. If you buy with the intention of selling at a profit, SARS may treat the profit as income from a trade, not as a capital gain. Intention matters.
2. If I sell one day, how is the gain taxed in my name versus in a company?
Ask for both calculations on your actual numbers. Include the tax on getting the money out of the company.
3. What happens to the profit if I want to reinvest it instead of spending it?
This is where structures differ most for someone building a portfolio.
4. What will this structure cost to run every year?
Accounting fees, annual returns, tax returns. A company that costs more to run than it's worth isn't a win. It's just admin with a logo.
What if you already own in your own name?
Then the question becomes whether to move it, and that's its own calculation. Moving a property triggers costs, although there's a route that defers the tax when the transaction qualifies. I've covered it in can you move property you own into a company?
The catches
Tax law changes. Rates and inclusion rules are set in the annual budget.
Your intention at purchase matters, and SARS looks at conduct, not only what you say.
A company is taxed on its profit, and you're taxed again when you take money out. Both layers count.
The home you live in has its own rules. Don't apply investment logic to your own pozzie.
This is general information. A registered tax practitioner must apply it to your situation.
Where the company fits
The point isn't to win the tax argument. It's to make the decision on purpose.
Sometimes the honest answer is your own name. One flip. A single property you'll never add to. I say that in the course too. When the plan is a portfolio, the ceiling, the ring-fence and scale usually decide it, and the tax is a cost you plan around.
The Vault has a bonus lesson on buying in your personal name and when it makes sense. Container first.
FAQ
Do you pay capital gains tax when you sell an investment property in South Africa?
Generally yes, if you sell for more than the base cost. A portion of the gain is included in your taxable income.
Is capital gains tax higher for a company than an individual?
On a straight capital gain, a company is generally taxed more than an individual, and dividends are taxed when profits are paid out.
Does my primary residence attract capital gains tax?
A primary residence owned by an individual qualifies for an exclusion up to a limit set by SARS. Check the current figure.
Is profit from flipping property a capital gain?
Not necessarily. If you buy to resell at a profit, it may be taxed as income. Ask your practitioner before you buy.
Should I buy property in a company to save tax?
Not for that reason alone. A company isn't automatically cheaper on tax. Decide on the ceiling, the risk and your plans, with a practitioner.
Related reading
Build the wall first
The Directors Fortress gives you the investor-friendly offer to purchase, the blueprint for registering the entity, and a walkthrough of the structure I use. R99 once off, yours to keep.
Education only. This article is general information, not tax, legal or financial advice. Speak to a registered tax practitioner, attorney or financial adviser about your own situation.
Sources
SARS, Capital Gains Tax: sars.gov.za
Income Tax Act 58 of 1962, Eighth Schedule
About the author
Michael Bowen co-founded ZAHomes. He bought his first property in 2003 on the outskirts of Amsterdam, with a 100% mortgage, at the wrong point in the cycle, and lost over €14,000 on it while sanding the floors himself in a heatwave. Twenty-odd years, 40-odd countries and a lot of property school fees later, he lives in Cape Town and teaches South Africans to buy and hold property inside a company. His view hasn't changed: an investor's greatest assets are the lessons from their failed deals.
