One must keep a close watch on the calendar while selling a real estate property in order to be aware of the effects of taxes on the sale of a property in India. The profits/gains obtained after the sale of the property is termed as capital gains. Capital gains can be further categorized into two, namely; long-term capital gains (LGCT) and short-term capital gains. (STCG).

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Where do you put your money when selling a house?

It is important for a seller to be well aware and informed about the taxes that may accrue from the sale of a house. If caught unawares, he might have to pay a massive amounts of taxes. A property, if sold within three years of purchasing it, any profit earned from it is termed as short-term capital gains. This is added to the total income of the person, and then only taxes are applied.

It is advocated that the entire money obtained from selling the house should be invested in purchasing another property within a time period of two years or constructing a property within three years, in order to avoid the payment of taxes after selling a property.

If the price of the new residential property is lower than the total sale amount, then the exemption is allowed proportionately. The seller can claim exemption under Sec. 54 (EC) of the Income Tax Act by investing the long-term capital gains for three years in bonds of the National Highways Authority of India and the Rural Electrification Corporation Limited within six months from the sale of the property. However, there is a limit of Rs. 50 Lakhs in the investment made in these bonds in the financial year.

A seller also has the option to set off the long term capital gains from the sale of the house against any long-term loss from the sale of other assets. These can be losses carried forward over the past years or even those incurred in the same year. However, in order to avoid tax on short-term capital gains, the only way out is to set them off against any short-term loss from other assets’ sale.

The seller can claim a refund of the TDS (Tax Deducted at Source) if he incurs a loss on the sale of the house or if he claims an exemption from long-term capital gains as per the abovementioned methods. To claim the refund, he should provide details of the investment of capital gains in his tax return. Else, he can also obtain a certificate from the assessing officer specifying that no TDS must be deducted on payments made to him and present the certificate to the buyer.

Do I have to report the sale of a home to the IRS?

It is crucial to report the sale of a house when filing for taxes at the end of the financial year. This is so, because by filing for income tax return, a person declares the amount of income that they have earned, the deductions claimed, and the taxes paid. It is essential to disclose the gains or losses made by the person on sale of the property.

Profits made from the sale of a real estate property within the period of two years of purchasing the property are reckoned as short-term capital gains (STGC). After two years, they are deemed as long-term capital gains (LTCG). The STCG is taxed at the slab rate, whereas the LTCG is taxed at 20% with indexation. Any expense that is imperative at the transfer of the property can be added to the indexed cost. This includes legal fees, stamp duty, registration fees, etc.

Further, one must include these capital gains in the ITR form. The requirements regarding capital gains in ITR-2 are extensive and depend on the type of asset that is being sold, the period of holding of the asset, whether it is a long-term capital asset or a short-term capital asset.

All such details must be disclosed, including the date of sale and purchase, the purchase amount, sales consideration, type of asset, transfer expenses, etc. It is indispensable to mention the costs that have been claimed while calculating capital gains. Even if the capital gains are exempted from tax payment, it is vital to disclose them while filing income tax returns.

How long do you have, to move out, after selling a house?

Depending upon the terms and conditions between the buyer and the seller, a person has to move out after the decided time period when the possession is passed to the new owners of the property at the closing of the deal. While conducting the sale of a property, it is crucial to not only negotiate the price of the property but also the moving date after the sale of the property is final. Such an essential topic needs to be discussed before finalizing the sale.

All the terms that have been negotiated by the parties and the real estate agent must be carefully laid down in writing at the time of the sale. In certain cases, the seller may have to move out immediately after closing the agreements. It must be kept in mind that the seller too needs time to move out and may request 30/45 days of occupancy.

There may also be instances where the seller seeks to occupy the property for a specific period after the agreement is closed. When such a situation arises, the sellers will pay the buyers an amount that can be categorized as rent until they occupy the property. Because of the existence of the agreement which makes the buyer as the official owner of the property, he is responsible for its finances.

Once the occupancy date has been finalized, it cannot be changed. It is said to be finalized when both parties have signed the purchase agreement of the property. The closing date is the most critical part of the transaction between the buyer and the seller.

How to avoid LTCG?

The property, whether land or house, is a capital asset. Gains from transferring of such assets attract capital gains tax. If a person sells a house within 24 months, he will have to pay STCG tax on the gains as per his income-tax slab. After 24 months, he will have to pay an LTCG tax, which is charged at 20% with indexation benefits. Section 54 of the Income Tax Act allows for an exemption if the property is sold and another property is bought.

The exemption under section 54 is available only when the capital gains from a property sold are reinvested into purchasing or constructing a maximum of two houses. However, the capital gains on the sale of a housing property must not exceed ₹2 crores in order to claim an exemption for reinvesting in two properties. This benefit can be claimed only once in a lifetime.

To claim an exemption on the entire LTCG amount, the entire amount has to be reinvested. It must be emphasized that the exemption will be reversed if the property is sold within three years of purchase and the capital gains obtained from the sale will be taxed as short-term capital gains. The new properties must be purchased either one year before the sale or two years after the sale of the property or the new residential properties must be constructed within three years of the sale of the property.

If a person is unable to use the capital gains to buy or construct new houses before the date of furnishing the return of income, he should deposit the amount in the capital gains account scheme (CGAS); else the gains become taxable. Even if a home loan has been obtained to buy the new property, capital gains exemption is valid under section 54 and also if it has been used to repay the home loan.

Further, Sec. 54EC allows for an exemption of LTCG on the sale of land and building if the capital gain amount is invested in certain specified bonds. The exemption is available for both residential as well as non-residential property. Specified bonds refer to bonds issued by the National Highway Authority of India, Rural Electrification Corporation.

What is the step by step process of sale?

One must take the following for the sale of a property

  • Make a proper valuation of the property. It is only after such an assessment that the seller of the property can determine its worth and lays down a price for which he wants to sell the property.
  • Check the market rate where the flat is located.
  • Find prospective buyers. Further, it is crucial to verify the buyer and conduct a background ground check such as a criminal check and a CIBIL check.
  • Obtain a NOC from various authorities mentioned below however this list is not exhaustive
  1. The society [where the flat is located]
  2. The income tax authority
  3. The municipal corporation
  4. The authority who is competent under the [urban land ceiling and regulation act]
  5. Any other authority
  • Lastly, documentation of the various necessary documents.

Given below is a complete list of all the relevant documents which are required for the sale of a flat/property. These are:

  • Letter of allotment

It is a document which when given to the buyer is evidentiary proof that the property mentioned is allotted to the holder of such document. It is given by the seller to the buyer.

  • Previous sale deeds [if any]

This is a very important requirement for selling a property. If the seller has all the previous sale deeds and has justified sales and transfer of the same, it becomes easier to sell the property as he has a record of the same. The better the documentation the higher the price can be quoted. It is mandatory under the law that the current owner should have the previous agreements with him as well.

  • Sale Deed/ Agreement

Once the documentation is cleared, the parties can then enter into an agreement to sell and confirm the terms and conditions. It is only after this that a sale deed is prepared. Thus, an agreement to sell precedes the execution of a sale deed. The sale deed is based on the agreement to sell.

This agreement is also signed and executed between the seller and buyer on a non-judicial stamp paper. After a complete documentation clearance, the buyer and the seller should sign the agreement stating the sale and confirmation of the property along with the negotiated terms and conditions. This document also indicates the seller’s intentions of selling his property.

Conclusion

Most sellers are aware of the tax liability that follows after the sale of the property. These can be classified as long term capital gains and short-term capital gains, depending on the amount of time that a person had the property for. In order to avoid paying tax on LTCG, the seller can either reinvest the entire amount into buying/constructing another property or may invest the entire amount in specific bonds.

Further, one most follow the necessary steps for the sale of a property such, as the valuation of the property, market rate of the location, search for potential buyers, procuring a NOC and the preparation of necessary documents such as a Letter of Appointment, sale agreement and the sale deed.