Sold inherited property at a loss? Check how to report capital loss in ITR-2 and save future tax

Have you sold an inherited property at a loss? Or are you looking to complete the sale soon? Do you have a clear understanding of the tax implications and applicable rules in such a case? These are some of the core questions that every aspiring seller of a property must ask themselves before clearing a property, to ensure meaningful estate planning and help them make reasonable tax savings upon the completion of the sale.

Now, do remember, selling an inherited property might not always result in a capital gain. This is possible due to factors such as market fluctuations, lower sale consideration, or higher applicable transaction costs, which may result in taxpayers incurring capital losses.

Given that such a loss does not create an immediate tax liability, reporting it correctly in ITR-2 is a wise step and an important part of the tax compliance process. This is because it can help taxpayers carry forward losses and apply them against eligible capital gains in future years.

Furthermore, it is vital to keep in mind that, under the Income Tax Act, 1961, capital losses can generally be carried forward for about eight assessment years, provided the taxpayer meets the basic requirements, such as filing income tax returns on or before the due date as defined under Section 139(1).

One more aspect to keep in mind is that short-term capital losses can generally be set off against both short- and long-term capital gains, whereas long-term capital losses can generally be set off only against long-term capital gains.

How is a capital loss on inherited property calculated?

The proper calculation of capital loss on inherited property requires determining the correct cost of acquisition. Under Section 49(1) of the Income-tax Act, 1961, the cost is generally considered to be the cost at which the previous owner acquired the property. This legal provision will apply if an individual sold a property at a loss in the previous financial year, i.e., FY 2025-26.

It is also clear that for older properties, obtaining original purchase documents and details can be challenging. In cases where the property was purchased or acquired before 1 April 2001, all taxpayers may opt to adopt the property's fair market value as of that date as the cost of acquisition, subject to applicable tax provisions and supported by an appropriate valuation report.

Mihir Tanna, Associate Director (Direct Tax), SK Patodia & Associates LLP, Chartered Accountants, explains this concept in detail. “In many cases involving inherited properties, the original purchase cost is not available. Where the property was acquired before 1 April 2001, the fair market value as on that date, determined through a valuation report from a registered valuer, may be adopted as the cost of acquisition for computing the long-term capital gain or loss and the resulting tax liability,” Tanna noted.

Let us now discuss key points to keep in mind while dealing with such transactions:

Who should file ITR-2?

ITR-2 is for individuals and HUFs earning income from sources other than business or profession. Still, before you file your taxes, it is wise to consult a certified tax planner to ensure compliance with tax authorities.

You should file ITR-2 if you have:

• Salary or pension income.
• Income from multiple house properties.
• Capital gains from assets like property, shares, or mutual funds.
• Foreign assets or income.
• Agricultural income above the prescribed limit.
• Other income not covered under simpler ITR forms.

Furthermore, those with business or professional income generally need to file ITR-3 instead.

5 steps to report inherited property capital loss in ITR-2

1. Choose ITR-2 while filing your income tax return, after consultation with a tax professional and having a clear understanding of whether this form applies in your case.
2. Enter property sale details under the capital gains schedule, as per the provided guidelines. Seek guidance in case of doubts to avoid mistakes.
3. Calculate the loss using the correct acquisition cost and expenses. Having a clear understanding of tax provision is essential here.
4. Report it as short-term or long-term capital loss, as applicable in your case.
5. File and verify the return on time to carry forward eligible losses. Keep in mind that not e-verifying will result in rendering your tax return as ‘invalid’

What is the significance of reporting losses in ITR-2?

All taxpayers should ensure that they disclose the sale of the inherited or acquired property along with the resulting capital loss in ITR-2, even in cases where no tax is payable. When you report facts accurately to the tax authorities, it facilitates meaningful compliance and preserves the ability to utilise eligible losses against future capital gains.

It is a given that inherited properties tend to often have old records, incomplete papers, a lack of proper documentation and serious valuation-related challenges. So taxpayers should diligently compute the loss and focus on maintaining supporting documents to avoid disputes, tax-related complications, and unforeseen tax notices, and to make sure that they do not miss available taxation benefits.

To resolve such tax-related complications, it is prudent to seek guidance from tax experts on a case-by-case basis.

Disclaimer: This article is for general informational purposes only and should not be considered tax advice. Tax rules may vary based on individual circumstances. Taxpayers should consult a qualified tax professional before filing returns or making decisions related to inherited property transactions.