Using a primary residence for business

Are you considering using a part of your primary residence for business purposes? If so, the information contained in the recently amended paragraph 45 of the Eighth Schedule of the Income Tax Act 58 of 1962 is relevant to you.

Paragraph 45, which deals with the so-called Primary Residence Exclusion, provides that natural persons must disregard the first R1,5 million capital gain or loss on their primary residences when these were sold.

After its amendment, it now further states that from 1 March 2009 natural persons may completely disregard the capital gain or loss on their primary residences where the proceeds of the sale do not exceed R2 million. There are two conditions:

1. A natural person can only disregard such a gain or loss where he/she was ordinarily resident in that residence throughout the relevant period, which commenced on or after 1 October 2001, and
2. He/she did not use the residence or any part thereof for the purposes of carrying on a trade during the relevant period, which commenced on or after
   1 October 2001.

Should this be the case – in other words, the market value of your primary residence is worth less than R2 million but you have been renting out a part thereof – you cannot rely on the amendment. But you can still fall back on the R1,5 million relief provided to you on the sale of such residence.

Please note that the R1,5 million relief is apportioned in cases where a primary residence is also used for business purposes. A primary residence is defined as a residence used mainly fordomestic purposes, i.e. more than 50% thereof. Should the guest house in a primary residence take up more than 50% of, for example, the square meters of the residence, the R1,5 million relief will also be forfeited when it is sold.

Consider the capital gains tax implications of using a primary residence for business purposes before taking such a step.