From a tax perspective, you are a co-owner of a house only if you have paid for it
I owned a residential house jointly with my mother. There is one more residential house owned by my father and mother jointly. My mother has not given any funding towards both the house properties. We are planning to sell both properties held for more than 5 years now and invest the proceeds to buy new residential home. The new home will be jointly owned by me and my father. Please let me know whether my father and I can claim benefits of long-term capital gain (LTCG) on sale of our respective old residential homes? If yes, kindly let me know the relevant section.
— Nilesh Parekh
From a tax perspective, the owner of a property is the person who has purchased the property by contributing to its cost. We have presumed that you and your father qualify as ‘owners’ of each of the properties in question by funding the costs of the respective houses. Accordingly, as your mother has not contributed to the purchase costs she will not be treated as a co-owner from a tax perspective.
A house that has been held for a period of at least 24 months by the owner is treated as a “long-term capital asset” and gains resulting from the sale of such a house are taxable as LTCG in the hands of the owner. In computing the LTCG, one would consider the indexed cost of acquisition of the house, as per the tax laws.
An exemption can be sought under Section 54 of the Income Tax Act, 1961 (the Act) from tax if the resultant LTCG is re-invested in the purchase or construction of one residential house located in India, subject to specified conditions. This re-investment should be made within the specified time frames (i.e. within one year before or two years after the sale date where the new property is purchased or within three years from the sale date where the new property is constructed).
We assume that both you and your father will jointly purchase a new residential house.
If the amounts invested by you in the purchase of the new house equals or exceeds the LTCG earned by you from the sale of the old house, the entire LTCG should be exempt from tax. Else, the difference between the LTCG and amount invested by you in the new house is taxable in your hands at 20.60% (inclusive of education cess).
Additionally, surcharge, if any, as applicable shall be leviable. Further, there could be a relief that could be claimed if your total income for the financial year in which the old house is sold (before considering the taxable LTCG) falls below the basic income threshold for the said FY.
Likewise, an exemption in respect of the LTCG earned by your father may also be claimed based on the amount re-invested by him in the new house.
Please note that if the new house is sold within a period of 3 years from its purchase or construction, there would be an additional tax impact to you or your father in respect of the LTCG claimed exempt previously.
If the new house is not purchased till date of filing the return you (and your father) can temporarily park the LTCG in designated capital gain account scheme before filing the return to claim the exemption. If the amount remains un-utilized for 3 years or is used for any other purpose the same would attract tax in year of such use or in the third year.
I want to gift my residential property to my daughter, who is 25 years old. I have held this property since last 7 years. Will such a transfer attract taxes?
Where an individual receives any immovable property free of cost and the stamp duty value of such property exceeds Rs50,000, the Fair Market Value of such a property would be taxable as ‘Income from other sources’. However, an immovable property transferred by a relative (including the parent) is not treated as taxable.
Therefore, the gifting of the residential property to your daughter should not give rise to income tax implications for her or you.
It would be prudent to have appropriate documentation in place, substantiating the gift as required under law.
Further, as your daughter is not a minor (i.e. she is over 18 years), any rental income or capital gains arising to her subsequent to the gift, if any, would be taxed in her hands and not clubbed in your income. Also, stamp duty implications (if any) of the transaction should be evaluated separately.
Parizad Sirwalla is partner (tax), KPMG
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