The question of whether Value-Added Tax (VAT) applies to the sale of residential property is a common one for those buying or selling homes in South Africa. With property transactions involving large sums of money, the VAT implications can have a significant impact.
This article provides a clear answer to the question Is there VAT on sale of residential property in South Africa?
Is VAT Payable on All Property Sales?
The short answer is no. Only certain types of property transactions attract VAT in South Africa.
For residential property sales, there is no VAT payable in most cases. However, for commercial property transactions, VAT is typically applicable.
Section 11 of the VAT Act provides guidelines on real estate transactions that are subject to VAT. Commercial property sales or rentals usually fall into the taxable bracket. But the sale of a residential property intended for use as a primary home is exempt from VAT.
VAT Exemptions for Residential Properties
There are two main instances where no VAT needs to be paid when selling a residential property in South Africa:
Sale of a Home Used as a Primary Residence
VAT does not apply on the sale of a home that was used by the owner solely for residential purposes. To qualify for the exemption, the property must have served as the owner’s primary and permanent place of residence prior to selling.
If the owner temporarily rented out the property, the exemption may still apply if it remained their official primary abode for most of their ownership period. But if it was used as a second home or converted into business premises, the VAT exemption would not be valid.
Sale of Vacant Land for Residential Building
The sale of vacant land intended to be used for residential purposes is also VAT exempt. However, there are conditions attached. The land must be explicitly earmarked for residential building according to town planning schemes. And construction must reasonably be expected to commence within 10 years.
The VAT exclusion also extends to vacant land that will be used for building residential extensions like garages, driveways or additional rooms. But it does not apply if the vacant plot is sold for commercial, farming or other non-residential development.
Ambiguous Cases of VAT Application
There are certain ambiguous scenarios where the VAT status of a residential property sale may be unclear. This can happen when:
- A property was partially used for residential and partially for business purposes
- A home office was operated from the residence
- The home was rented out for most of the ownership period
In such cases, the VAT liability will depend on the precise circumstances and dominant usage of the dwelling. Professional advice from a tax expert or SARS could provide guidance regarding the VAT implications before finalizing the transaction.
Exemptions Only Apply to Sale, Not Construction
While the eventual sale of a residential property may be VAT exempt, it is important to note that the construction process does not enjoy the same exemptions. In most cases, VAT must be paid on building materials as well as construction services for the home.
The VAT exclusion only takes effect once the residential dwelling is complete and eventually sold or rented for residential occupancy.
Notifying SARS of an Exempt Sale
When selling a residential property where you claim a VAT exemption, you still need to notify SARS by completing a VAT 263 form. This serves as a declaration that VAT is not payable on that particular real estate transaction due to the exempt status of the dwelling.
Proper documentation should also be retained as supporting evidence of the property’s residential status in case SARS requests proof at any point.
Can You Recover VAT Paid on Property Purchase?
A common question is whether buyers can claim back VAT that might have been paid by former owners of the residential property at earlier stages.
Unfortunately, once VAT has already been paid on goods like building materials or services like architect fees to construct the dwelling, that VAT portion becomes embedded in the final selling price.
As the buyer of an exempt residential property, you cannot recover any VAT amounts previously incurred even though they may implicitly form part of what you pay for the house. Reclaiming VAT is only possible on taxable purchases.
Profit Made on Sale May Still Attract CGT
While the actual sale of a primary residence is exempt from VAT, any profit made on selling the house could still be taxable via Capital Gains Tax (CGT). But there are exemptions and exclusions in this regard.
For example, the first R2 million gain on disposal of a primary residence may be excluded from CGT calculations under the “primary residence exclusion” allowance.
So while you don’t pay VAT on selling or buying a home for residential occupancy in most cases, you still need to consider other taxes like CGT on sale profits exceeding certain thresholds.
Determining whether VAT applies to the sale of residential property in South Africa can be confusing. With numerous exemptions and conditions around selling or buying homes and vacant land intended for housing, it is crucial to understand the rules.
While in most standard cases, selling your primary residence or vacant residential plot will be VAT exempt, there are grey areas to be aware of. Small details about the usage, zoning or intended purpose of the property can sway the VAT ruling.
To quickly indicate whether your specific property sale is likely to attract VAT, use our free online VAT Calculator for Property Transactions. By answering a few key questions, you will get an indication of your likely VAT obligation. Consult a tax advisor if you need further assistance.
Getting clarity on VAT can empower you to finalize your property deal with confidence. Understanding if and when VAT is payable on the sale of your residential property in South Africa takes the guesswork out of this major financial decision. Use our VAT calculator today for your peace of mind.
What If I Run a Small Business from My Home?
If you operate a home office or small business from your primary residence, the VAT exemption still applies when selling the property. This is on condition that the dwelling was used predominantly (more than 50% of the floor space) for residential purposes for most of your stay.
Are Retirement Homes VAT Exempt on Sale?
Retirement complexes and old age homes used predominantly as permanent residences for retirees also qualify for the VAT exemption when selling the units. This includes cottages, apartments and houses within retirement villages used as primary homes.
Does A Holiday Home Attract VAT On Sale?
The sale of secondary residences like holiday homes, guest cottages and vacant plots not intended to serve as primary places of residence will typically attract VAT at the standard 15% rate. So while your primary abode’s sale is VAT free, second homes often do have a VAT implication.
What About Selling Unfinished Residential Projects?
Even if a residential construction project funded directly by the property owner remains incomplete at the time of sale, the VAT exemption may still apply if the partially built dwelling was clearly intended for use as a primary residence once completed. An assessment is made based on building plans and permissions in this scenario.