As the seller of a property in SA, you have to pay these costs if they apply to you:
- Municipal rates and taxes, and often costs for services (such as electricity and water) for up to 4 months in advance
- Body corporate or Homeowner’s association levies, in advance
- Estate agent commission
- Bond costs
- Costs of obtaining electrical, gas, electric fencing, beetle, and plumbing compliance certificates
- Possible Capital Gains Tax (CGT) on the profit made on the sale.
Except for the payments needed for rates and levies (the first 2 points above) – which have to be made after your sale becomes unconditional – all the other costs can be paid when the property is transferred into the buyer’s name, and so can be paid with the net proceeds of the sale.
You also need to budget for the costs of moving out, and all expenses associated with purchasing or renting your new property.
Municipal Rates and taxes (and services)
Various documents (such as the title deed) must be lodged with the Deeds Office before a property can be transferred into the buyer’s name.
One of the required documents is the Rates Clearance Certificate, which is obtained from the local municipality, and is evidence that all rates, taxes and municipal services have been paid in advance for up to 120 days (4 months).
In order to obtain a clearance certificate, the seller has to settle any outstanding invoices and pay in advance for up to 120 days. The clearance certificate is only valid for this period and for the named seller and buyer. The exact calculation varies.
The conveyancers will ascertain the amount payable and advise you. The amount paid is not an additional cost associated with the sale, it is just an early upfront payment of the rates that you would have to pay anyway.
After the rates clearance payment has been made, the seller’s account with the municipality will be in credit (because of the advance payment).
It is a good idea to stop paying all municipal invoices as soon as the agreement of sale becomes unconditional since your advance payment should cover all the future invoices. It is also the seller’s responsibility to cancel the municipal (and body corporate, if applicable) accounts when required.
If the property is transferred to the buyer before the end of the certificate’s validity period, then, depending on the sale agreement, the seller normally is owed a refund. The seller must contact the municipality about the refund as this is not the conveyancer’s job. The refund can take several months (if you’re lucky!).
Since any clearance certificate payment must be made before the property can be transferred into the new buyer’s name it cannot be made out of the proceeds of the sale.
The seller must therefore make arrangements to have the cash available to make the payment. If you intend using your bond to obtain cash, please read the important note below under the Notice Period Penalty section.
Body corporate or Homeowner’s association levies
If you have a Sectional Title unit or live on an estate, then a Levy Clearance Certificate from the body corporate or homeowners’ association is also required. Typically this will be an estimation of the levies payable (and possibly electricity too if that is collected by the body corporate) for a period of 3 months. Similarly to the payment made for the Rates Clearance Certificate (see above), the amount paid for the levy certificate/s is not an extra cost associated with the sale, it is just an early upfront payment of the levies that you would have to pay anyway.
The conveyancers will ascertain the amount payable and advise you.
The payment is made by the conveyancers to the body corporate/homeowners association when the transfer is lodged at the Deeds Office i.e. prior to transfer. The buyer, when signing the sale documents, will be requested to pay some portion of the estimated levy amount. As the seller, you may have to pay the balance of the estimated levy amount prior to transfer or sometimes it can be deducted off the sale proceeds on transfer.
Estate agent commission
The estate agent commission is paid only when the property is transferred into the new buyer’s name i.e. at the same time that the conveyancers pay the net proceeds of the sale (after deducting the commission and bond amounts) to you.
The agency commission is likely to be the biggest cost by far, so it pays to consider your selling alternatives carefully. Your options would be:
- using a traditional estate agent
- selling privately (by owner), or
- using modern estate agency that is technology-enabled.
If you have an existing bond with a bank, the bank will charge you to cancel it when you sell the house.
The bond cancellation costs total about R3000 per bond and are payable on transfer so no advance cash payment is necessary.
Early Settlement Penalty
If you are repaying a bond within 2 or 3 years (depending on the bank) of having purchased the property, your bank may be entitled to charge you an “early settlement” fee. You would need to ask your bank whether this penalty could apply to you and, if so, how it would be calculated.
Notice Period Penalty
Most banks require 90 days’ written notice that you will be repaying the bond in full because of the expected sale of your property. If you don’t give the bank notice it may charge you penalty interest. Penalty interest is extra interest payable on the outstanding balance of your bond.
The recommended course of action is to speak to your bank about its policies so you are fully informed before you sell.
For illustration, the notice period penalty would be calculated as follows:
if you give the bank 1 month’s notice, the bank will charge you 2 months’ penalty interest but if you give 2 months’ notice it will only charge you 1 month of penalty interest.
The penalty interest would be added to the outstanding amount of your bond on the date of transfer so no cash payment is necessary.
The transfer process – from the date that the offer to purchase is accepted by you to the registration of the property into the buyer’s name – normally takes 2.5 to 3 months. So it is common that sellers only inform their bank once the agreement of sale has been finalised (there is then the chance that they could be liable for a small amount of penalty interest).
To avoid having to pay penalty interest altogether, give the bank notice as soon as you intend to sell. Then, before 3 months is up, you may need to give notice again, and so on every 3 months (although validity of the notice period varies by bank). BUT remember that, after you have given notice, the bank will freeze your facility so you won’t be able to draw on it. If you need money from your bond to pay your rates and taxes or levies in advance or any other costs then you should draw out this money from your bond before giving notice of cancellation.
Some banks won’t charge penalty interest if you will be taking out a new bond with them on another property.
Remember to speak to your bank first to find out their policy.
Before a property is transferred into the new buyer’s name, various compliance certificates are required. These are:
- Electrical – to confirm that the electrical wiring etc. is up to standard
- Beetle (entomological) – to confirm that the wood in the property hasn’t been infested by beetles (usually only needed if your house is at the coast)
- Gas – to confirm that the gas lines are safe (only needed if you have gas appliances in the house)
- Electric fence – to confirm that it is safe
- Plumbing – to confirm that the plumbing is sound (only required in Cape Town). Note: this certificate does not confirm that the property is free from rising damp or that there are no blocked drains.
These inspections each cost R500 and up, plus VAT, and normally take place only after any other conditions in the sale agreement (such as the buyer obtaining a bond) have been fulfilled. If there is work to be done to achieve compliance then the contractor will give a quote for it.
It is the seller’s responsibility to arrange and pay for the inspections (and any remedial work needed) but often the contractor will be happy to delay receipt of payment until transfer takes place.
Property Capital Gains Tax (CGT)
According to the Income Tax Act, a “capital gain” (profit) is made when the selling price of a property is more than the sum of the original purchase price, any capital improvements and the costs of buying and selling (and the seller is not in the business of buying and selling properties – in which case 100% of the profit would be included in taxable income).
Capital Gains Tax (CGT) refers to the tax applied by SARS to a capital gain. This tax would be payable by the seller.
However, in many cases the sold property will qualify as a so-called “primary residence”, which means that there will be either no CGT or only a reduced amount of CGT payable.
Assuming you meet all the requirements for the primary residence exclusion, then if you make less than a R2 000 000 profit there is effectively no CGT payable.
It is recommended that you consult a tax practitioner if you think the sale of your property could create a tax liability for you.
For illustration, we provide an example below of how the CGT calculation works for an individual.
If we assume the:
- net selling price of a property was R4 500 000 (after deducting estate agent commission)
- original purchase price was R1 500 000
- capital improvements (not repairs and maintenance) were R600 000, and
- costs associated with the original purchase (e.g. transfer duty, legal fees) were R100 000,
then the “capital gain” would be calculated as R4 500 000 – (R1 500 000 + R600 000 + R100 000) = R2 300 000.
For an individual, forty percent (40%) of the capital gain must be included in the seller’s tax return and is subject to income tax at the seller’s marginal rate. (For a company or trust, the inclusion rate is 80% instead of 40%.)
In the above example, this would mean that 40% x R2 300 000 = R920 000 should be included in the tax return. Assuming a marginal tax rate of 45%, this would result in a tax payment of 45% x R920 000 = R414 000 to SARS by the seller.
But SARS does provide some relief if the property is a so-called “primary residence”. So if:
- the property was registered in the name/s of natural persons (not a CC, trust or company), and
- the owner or spouse lived on the property,
then the first R2 000 000 of the capital gain is excluded.
In our example above, the amount of capital gain included in the seller’s income would be reduced to 40% x (R2 300 000 – R2 000 000) = R120 000. The seller would only pay capital gains tax of 45% x R120 000 = R54 000.
So there is effectively no CGT payable if your gain is less than R2m and you meet all the requirements for the primary residence exclusion.
The R2 000 000 exclusion amount is reduced when:
- the property is greater than 2 hectares in size, or
- part of the house was used for business purposes.
If the property was acquired before CGT was introduced in 1 October 2001 then the actual purchase price is not used in the calculation and there are other ways of estimating a purchase price as of that date.
There is also an annual capital gain exclusion of R40 000. So if you don’t have any other capital gains in your tax return, you can reduce the capital gain from your property sale by this amount.
In our example, this would mean that the amount of the capital gain included in the seller’s income would be 40% x (R2 300 000 – R2 000 000 – R40 000) = R104 000. The CGT ultimately payable would be 45% x R104 000 = R46 800.
Including an amount for the capital gain in your income for the year will probably mean that you end up in a higher tax bracket for that year.
If the sold property is owned 50/50 by a husband and wife, the R2m primary residence rebate is split 50/50 between them for the purposes of their individual tax returns.
While efforts have been taken to ensure that the information in this document is correct, it should not be relied upon nor considered to be legal, financial or tax advice. A qualified conveyancer, accountant or tax practitioner should be consulted.