People often sell their homes in order to upgrade, obtain cash to pay off debts or start a business, upon divorce in order to satisfy the terms of a property sharing order, when they migrate to another country, etc. Whatever the reason, there may be capital gains tax upon such a disposal or sale. Capital gains tax is chargeable and collected in terms of the Capital Gains Tax Act (Chapter 23:01) on sale or disposal of marketable securities, immovable properties and certain intangible properties (collectively known as “specified assets”). An immovable property includes land, dam, road, a building (of any kind) or structure with foundations in the soil. A marketable security is any security, stock, debenture, share or any other interest capable of being sold in a share market or exchange. Movable assets, like cars, plant and machinery, equipment, boats are not subject to capital gains tax. The property should be situated in Zimbabwe to attract capital gains tax and in respect of marketable securities, the person must be carrying on his investment activities in Zimbabwe.
Computation of capital gain tax liability
The key information for determining gain or loss is the gross capital amount and the cost base. Gross capital amount is the proceeds received from sale or disposal the specified asset. It includes money or other debts assumed as part of the sale. Gross capital amount can also arise from donation, redemption/maturity of specified assets, compensation for expropriated property, involuntary disposal such as sale by the court to recover a debt, cession or transfer of rights in condominium property etc. If a home is foreclosed or repossessed or one receives a compensation for damaged or destroyed specified assets the law deems a sale in respect of the specified asset. If one contracts to have a house built on land owned by him/her, the basis is the cost of the land plus the amount it cost to complete the house and if otherwise one uses other means. This amount includes the cost of labour and materials, or the amounts paid to the contractor, and any architect’s fees, building permit charges, utility meter and connection charges, and legal fees directly connected with building the home. If the acquisition was through inheritance, cost basis is equal to the value established in the estate of the deceased. Inflation allowance is granted on cost acquisition/construction and cost of improving the asset. The tax is levied on the gain at the rate of 20% for a home acquired or constructed by the seller after 1st of February 2009 and at 5% of the proceeds if acquired or constructed prior to this date.
Records of the home’s purchase price or construction cost, cost of improvements, additions, and other items that affect the cost base of the home should be kept. The records are required to prove the costs to ZIMRA. Title deeds and receipts for expenditure incurred on the house can be lodged with the bank or lawyer for safe keeping.
Minimising capital gains on sale of your home
Rollover relief when you replace your main home
A PPR is one’s sole or main residence (main home), land which he/she owns or an undeveloped stand. One should have been staying in that house prior to its sale throughout the period owned or for at least 4 years. Any other shorter period is acceptable especially when one was denied occupation of the house because of work commitments or other similar circumstances.
The law allows one to defer capital gain tax accruing on sale of the main home if one reinvests the proceeds of sale to purchase or construct another home or purchase a residential stand in Zimbabwe. If one has more than one home, only the sale of the main home qualifies for rollover relief. If the home is used for business it ceases to qualify as the main home, but if used for both purposes one has to apportion the capital gain for rollover purposes. If the home is registered in the company name the rollover relief is not applicable since the owner of the property is the company.
Sale of principal private residence by an elderly person
If one is 55 years old or above, the law exempts him or her from capital gains tax on disposal of his or her main home.
Spouse and Children
If one sales or transfers the home to the spouse, or former spouse incident to divorce, one generally has no gain or loss, even if one were to receive cash or other consideration for the home. If one owned the home jointly with a spouse and transferred interest in the home to a spouse or former spouse incident to divorce, the same rule applies. A marriage certificate is a prerequisite to qualify for the benefit. However a disposal of the home or any other specified asset to one’s child, capital gains tax applies.
Capital gains tax and estate duty do not interact on the same asset. A specified asset that is sold, realized or distributed by the executor of a deceased estate of a specified asset forming part of such estate is exempt from capital gains tax. However estate duty tax is applicable.
Property held in a trust does not form part of the estate of a deceased person. A trust never dies; it continues in perpetuity and therefore is never liable to pay estate duty. A trust can also save the person on executors fees, stamp duty, or conveyance fees, that could be payable by the estate or heirs. Thus, assets that are transferred into a trust before death are protected from estate duty as long as the donor survives the donation by 5 years. However, a donation of specified asset made to a trust is subject to capital gains tax. In order to avoid both capital gains tax and estate duty one may consider purchasing a property out of a trust.
It is often misleading to think that selling a house is just about exchanging money with title deeds. The excitement, emotions and expectations can blind people from reality. In fact there is more to this than what meets the eye. A valuation has to be sought on of the property, property agent fees, legal fees for change of ownership on the part of the buyer and even capital gains tax is not excluded in this transaction. The capital gains tax however depends on who you are selling to and when. Not knowing that properties are subject to capital gains tax can disappoint the seller as you can either gain or lose money from the transaction. Also the source of disappointment can be your failure to keep records resulting in your gain being overstated. So next time you sell your house you are now aware of the dos and don’ts.