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Tax Treatment on the Sale of Your House


Tax Treatment on the Sale of Your House

  • By Saral Credit
  • October 02, 2021

Keeping an eye on the date and time to sell the house is quite difficult. Tax treatments vary from country to country.  If you miss out on time, you could end up paying a hefty tax. Short-term capital gain is when you sell your property within two years of buying it. This is added to the owner's total income and taxed according to the slab rate applicable to him. If you are an Indian or want to sell your property in India, then if the duration of the asset is less than 2 years, it is considered the short-term, and for the long-term, the tax rate will be 20.8% with indexation. If a property is sold within three years of buying it, any profit from the transaction is treated as a short-term capital gain. If the sale fulfills certain conditions, then long-term capital gains on the sale of real estate are taxed 20% plus a cess of 3%. If the property is gifted to you or you have the inherited property, you will be liable to pay capital gains tax.

So for the tax benefits, it is advised to hold the property for at least three years. Many people especially who do not file their income tax return are unaware of the profit that can have on the sale of their house. So, let's talk about the benefits, like if you sell after three years of the purchase, it is treated as the long-term capital gain. It is taxed at 20 % after indexation; indexation considers the inflation during the holding period. This can increase the tax burden for the seller. There are other benefits too; in case of long-term capital gain, the owner can claim various exemptions, but no such benefits are provided for the short-term capital gain.

The best thing about the long-term capital gain is that expenses incurred on repairing and renovation can be added to acquiring the residential house. This is not enough; you can add to the cost of the interest paid during the pre-construction period of the house. 

Tax liabilities based on holding period:

The critical and initial step to determine tax liabilities is the period of holding. These tax liabilities can be on shares, bonds, immovable property, or any other capital asset. Benefits of indexation depend upon the nature of asst, i.e., whether capital asset if a long-term investment or the short-term asset is defined under section 2(29A) and section 2(42A) of the income tax act 1961. Before FY 2019-20, if the taxpayer owns more than one self-occupied house property, only one is considered and treated as self-occupied property. Another one will be assumed to be let out. But here, the taxpayer has a choice which property to choose as self-occupied.

How you can save on tax when selling property:

When you think of selling a house, then you should be very clear about the tax benefits. This is the point to know that if you use the entire amount from the transaction to buy another house within two years or construct one within three years, then there is no tax to be paid. The point to note down is that a two-three year period applies even if you bought the new house a year before selling out the first one, but the property should be in the seller's name. If the entire capital gain is not invested, then the balance amount is charged to long-term gain tax. If the new property is sold within three years of purchase or construction, the entire exemption will be reversed. The sale of the previous house and the whole capital gain from that will be considered short-term gains and taxed at the normal slab rates.

There is another way out if you are the one who is not keen to lock in your gains from the sale of the house in another property. Under section 54 (EC), you can claim exemption by investing the long-term capital gain in bonds for three years. But this you have to do within six months of selling the house.

Investing long-term capital gain in a technology-driven startup is also another way to invest. These investments are to get relief from the tax. When you invest in computers and software for your startup, it is allowed to claim exemption of tax on the sale of a house held for at least three years. 

Some of the strategies are here can make your efforts when it comes to paying taxes easier.

  • Paying Capital Gain Tax: This is a simple strategy; you have to pay the capital gains tax here. There are some benefits of doing so, the tax is now paid, and there is no need to worry about it anymore. Here the money is not locked in any other property or tax strategy. The money which is remaining can be spent however you like. This option is far better than the income tax rate. Depending upon the income level, rates ranged from 0-20 or more. If you are the one who doesn't want to dive into this first option, then here is the second one.
  • Installment Sale: If you want to keep your income out of higher tax brackets, this can be a powerful long-term strategy. This strategy involves receiving and spreading the income over time. It includes the interest payment from the buyer. Other investments and legal strategies are involved when we talk about installment sales, and these have nothing to do with the tax planning. There are various things to be considered, like what's your security as the lender over time? Is there any loan involved and assumed by the buyer? What is the interest rate you are receiving? These questions are common questions that can vary depending upon your circumstances. But, though it is complex, this can be a great tax strategy to consider while selling out the property.
  • Money parking in government schemes: Various government-mandated schemes are offered for the high returns on total investments. This also works in tax waving. Under section 80C of the income tax act, an individual can claim up to Rs. 1.5 lakh spend on such investments as tax waivers. Many options are available like Sukanya Samridhi Yojana, senior citizen saving scheme, national pension scheme, and national pension scheme.

A taxpayer can invest any capital gain amount that he wants to defer. The capital gain can be from the sale of stock, real, or personal property. The only gain amount needs to be reinvested. After the sale or disposition of the property, the taxpayer must invest in an OZ property within 180 days to qualify. Whatever amount the taxpayer wants to defer, the capital gain proceeds must be invested in purchasing the rental property. This should be new to the investor or already existing property owned by the taxpayer.

Knowing about TDS:

The government has made it mandatory for the buyers to deduct TDS when they buy a house worth over Rs 50 lakh. Before making payments to the seller, 1 % of the property's value has to be deducted. But before it happens, make sure the buyer deposits the amount with the tax authorities on behalf of the seller. By this, you can claim credit for the payment. The time for the deposition is till last month; this amount must be deposited within seven days from the end of the month. The month is considered in which the sale transaction was done. 

Some tips for the sellers:

  • The exemption is allowed even if the builder of the new residential construction fails to hand over the property to the taxpayer.
  • Before selling the house, be sure about the calculation; if the cost of the new house is lower than the total sale amount, the exemption is allowed. But this time it will be given proportionately. After that, you can reinvest the money. 
  • In the year in which the sale took place, and you cannot reinvest the gains in another house or bonds before filing your tax return, make sure you deposit your balance in the capital gains account scheme. This will make you eligible for the deduction. 
  • Suppose the actual sale value is lower than the valuation of the property by the state authority. In that case, the tax department can object as capital gains are calculated based on the valuation adopted by the state registration authority and stamp duty. 

If you live in India, then there are different tax treatments, and if you live outside India to some other country, then tax implications are different while selling your house. Tax treatment depends on how long you owned and lived in the home before the sale. How much profit you made is also considered. While thinking of selling out the house, it's pretty confusing when it comes to the tax-saving or the tax treatment. But the above information will clarify all your confusion, and now you can invest your capital gain, or the remaining amount anywhere mentioned above to save tax. Although tax is a vast topic, this is enough to show tax