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The FYI on the tax implications of selling a house inherited from a deceased estate

The FYI on the tax implications of selling a house inherited from a deceased estate

June 12, 2024


When loved ones pass, they often take care to bestow a legacy on those they left behind. Being bequeathed a property in South Africa can be a touching gift, but it might leave you wondering about the tax implications of such an inheritance. While there is no immediate inheritance tax on such a bequest in South Africa, Capital Gains Tax (CGT) is likely to apply when you sell this home or property.

What is Capital Gains Tax, and how does it affect you when you inherit (and sell) property from a deceased estate in South Africa as a non-resident? It’s not as intimidating as it sounds if you break it down into bite-sized chunks. So, read on, and let’s tackle the subject straightforwardly.

Good news: there is no immediate inheritance tax on the property in South Africa

There’s no immediate tax on inheriting property from a deceased estate. This is covered under estate duty, in which a tax is levied on the total value of the deceased estate, including the property. This tax is paid from the deceased estate and has nothing to do with your inheritance.

Your part in the tax implication of your inheritance is delayed until you dispose of it. At the point of sale/disposal, your tax residency status at the time determines the tax implications of the transaction.

What is Capital Gains Tax (CGT)?

South Africa’s CGT applies to profits made when selling assets (property, shares, businesses) for more than the acquisition price.

Who pays CGT?

Depending on residency status and the asset type, individuals, companies, and trusts can be liable for CGT.

When does CGT apply?

CGT applies only when you dispose of an asset and make a capital gain (selling price exceeding the base cost, including inflation adjustments).

The Capital Gains Tax rate

The CGT rate is tiered based on your taxable income bracket. The maximum effective rate for most individuals and specific trusts is 18%. Higher rates apply to companies and certain trusts.

Calculating CGT on property inherited from a deceased estate

CGT applies to profits from selling inherited property. Here are the key factors:

  • Base cost: The property’s value on the date of inheritance is the starting point for determining your capital gain.
  • Selling price: The difference between the selling price and the base cost represents your capital gain.

As such, you will pay CGT on the profit of the sale, not the inheritance value. 40% of your capital gain is taxed at your marginal income tax rate, resulting in a maximum effective rate of 18% for individuals.

Important notes on CGT

  • Exemptions and exclusions exist for certain assets, like primary residences, up to a specific value.
  • Non-residents selling property might face additional withholding tax.

Tax implications: resident vs. non-resident

  • Residents: Only CGT applies when selling an inherited property.
  • Non-residents: CGT and withholding tax might apply (more on this later).

Understanding your residency status is vital when disposing of a property you inherited from a deceased estate.

Before selling, clearly understand your residency status and its tax implications. Additionally, keep records of the inheritance date and property value for base cost calculations and receipts for any improvements you’ve made to the property that have increased its value.

Read more: Grasping Capital Gains Tax on Inherited Property in South Africa.

Selling inherited property as a non-resident

If you’re not a South African tax resident, you’ll be considered a non-resident and subject to withholding taxes on the property sale (outlined in section 35A of the Income Tax Act) if the sale exceeds R2 million. This CGT must be paid to the South African Revenue Service (SARS) for successful property transfer registration.

Read more: The tax implications of selling your South African property as a non-resident.

Taxes affecting non-resident sellers

As a non-resident seller of inherited property, two central taxes might impact your transaction:

1. Capital Gains Tax (CGT): This applies when selling an asset (including inherited property) for more than the base cost.

  • For inherited property, the base cost for calculating CGT is the property’s value on the date of inheritance.
  • Tax rate: depends on your taxable income and can be up to 18% for individuals.

2. Non-resident withholding tax: This applies to non-resident sellers when the property sells for R2 million or more.

  • Tax rate: depends on the legal entity (individual, company, or trust) and can be up to 15%.
  • Purpose: to secure any potential CGT owed by the seller.
  • Important: the purchaser withholds the tax and pays it to SARS.

Key takeaways on tax implications of selling a house inherited from a deceased estate

  • Residents selling inherited property are subject to CGT only.
  • Non-residents selling inherited property might face both CGT and withholding tax.
  • Under specific circumstances, you can apply to SARS for a reduced or waived withholding tax.

Inheriting property in South Africa can be a positive experience. With proper management, it can, in fact, be financially beneficial for you and your family. When considering selling your inherited asset, understanding your South African tax residency status and the tax implications is vital to avoid being overtaxed.

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