Home Office Deductions: The CGT Consequences Many Taxpayers Miss
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Claiming a home office deduction can be an effective way for taxpayers to reduce their annual income tax bill. For many professionals, working from home is no longer the exception but the norm, and the ability to deduct a portion of rates, electricity and other costs can provide welcome tax relief.
However, what is often overlooked is that these deductions can have capital gains tax (CGT) consequences later, when the primary residence is sold. In some cases, the impact is neutral. In others, it can turn what would have been a fully exempt disposal into a taxable one.
Understanding when and why this happens is essential for both taxpayers and their advisors.
The basic principle
South Africa’s tax legislation provides a generous CGT relief for primary residences. On disposal, the first R2 million of the capital gain is disregarded. This exemption, however, is not absolute. Where:
A portion of a primary residence is used for trade, and
Home office expenses are claimed and allowed for tax purposes,
the primary residence exemption is restricted to the private-use portion.
The capital gain must be apportioned between:
The private-use portion, and
The business-use portion.
Only the private-use portion qualifies for the primary residence exemption. The business-use portion is fully subject to CGT. Importantly, it is not the existence of a home office that causes the problem, it is the claiming of deductions.
How SARS apportions the gain
SARS generally requires apportionment based on:
The floor area used for business purposes, and
The period of time during which the home office was used and deductions were claimed.
This means the CGT impact depends heavily on:
The size of the home office in relation to the size of the entire home
How long it was used to claim home office deductions and
The size of the overall capital gain.
This is where outcomes can differ significantly. Lets have a look at some examples on how the CGT is calculated.
Example 1: Home Office Claimed Increasing CGT
Facts
Purchase price of home: R1 750 000
Selling price: R2 850 000
Capital gain before exclusions (R2 850 000 – R1 750 000): R1 100 000
Home office details:
15% of the total floor area used as a home office
Home office deductions claimed for 6 out of 12 years of ownership
Step 1: Determine the business-use portion
Floor area used for trade: 15%
Time used for trade: 6 / 12 years = 50%
Business-use portion:
15% × 50% = 7.5%
Step 2: Apportion the capital gain
Total capital gain: R1 100 000
Business portion (7.5%): R82 500
Private-use portion (92.5%): R1 017 500
Step 3: Apply the primary residence exclusion
The R2 million primary residence exclusion applies only to the private-use portion
Result:
Private-use portion:
R1 017 500 – R1 017 500 = R0 (fully absorbed)Business-use portion:
R82 500 (does not qualify for the exclusion therefore it is subject to CGT)
Step 4: Final CGT position
Capital gain subject to CGT: R82 500
Less: annual exclusion (R40 000)
Aggregate capital gain: R42 500
Amount included in taxable income (40% inclusion rate for individuals): R17 000.
What if no home office deductions were claimed?
Without a home office claim, the entire gain of R1.1 million would have been fully exempt. Claiming a relatively small home office for only half the ownership period creates a real CGT cost. This is the exact risk area for:
Flats
Townhouses
Later property purchases
Moderate property price growth.
Example 2: Home office claimed — No Impact, CGT remains the same
Facts
Purchase price of home: R1 600 000
Selling price: R4 200 000
Capital gain before exclusions: R2 600 000
Home office details:
18% of the total floor area used as a home office
Home office deductions claimed for 6 out of 12 years of ownership
Step 1: Determine the business-use portion
Floor area used for trade: 18%
Time used for trade: 6 / 12 years = 50%
Business-use portion: 18% × 50% = 9%
Step 2: Apportion the capital gain
Total capital gain: R2 600 000
Business portion (9%): R234 000
Private-use portion (91%): R2 366 000
Step 3: Apply the primary residence exclusion
The R2 million primary residence exclusion applies only to the private-use portion
Result:
Private-use portion after exclusion:
R2 366 000 – R2 000 000 = R366 000Business-use portion:
R234 000 (fully taxable)
Step 4: Final CGT position
Capital gain before annual exclusion: R366 000 + R234 000 = R600 000
Less: annual exclusion (R40 000)
Aggregate capital gain: R560 000
Amount included in taxable income (40% inclusion rate for individuals): R17 000
What if no home office deduction were claimed?
If no home office had been claimed:
Capital gain: R2 600 000
Less: primary residence exclusion: (R2 000 000)
Less: annual exclusion: (R40 000)
Aggregate capital gain: R560 000
Taxable capital gain: R224 000 👉 Exactly the same CGT outcome.
Why Was there no CGT Impact in Example 2?
In example 2, the home office does not make a difference as:
The total capital gain is well above R2 million,
The primary residence exclusion is fully exhausted regardless, and
The business-use portion simply changes how the gain is split, not how much is taxed.
When does a home office increase CGT?
A home office is most likely to increase CGT where:
The total capital gain is close to or below R2 million, and
A meaningful portion of the home is used for business, and
Home office deductions were claimed for several years.
In these cases, the business-use portion of the gain cannot be absorbed by the primary residence exemption and becomes taxable.
Practical rule of thumb for practitioners
If the total capital gain on a primary residence is below R2 million, claiming home-office deductions will usually increase CGT.
However, if the gain is well above R2 million, the CGT outcome often remains unchanged.
In Summary
Home office deductions offer short-term tax relief, but they can carry long-term consequences. Taxpayers should be made aware that:
Claiming a home office deduction can reduce or partially forfeit the CGT primary residence exemption
The impact depends on the size of the gain, not just the size of the office
Smaller properties and later purchases are more exposed to CGT risk.
Before claiming home office expenses, it is worth weighing the annual income tax benefit against the potential CGT cost on disposal. Sometimes, the deduction is worth it. Other times, it can be an expensive surprise.
Watch the SARS video below to find out more on this topic.
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