Tax liability on selling 1 property (owning 2 properties)

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  1. Varun D

    Varun D New Member


    I had a query with regard to tax liability when selling 1 property (of the two that I own). I am presently living in Property 1, while my mother lives in property 2. Both properties are on my name. Property 1 was purchased in 1987, and property 2 was purchased in 1997. I will be selling property 2, and reinvesting the entire proceeds into property 3. Property 3 is a re-sale purchase, i.e. it is ready to move into (more than 20 years old).

    Based on my understanding, since I am re-investing any gain made out of property 2 into property 3, I will not be liable for any long term capital gains. However the questions I had was - would I be then liable for 20% tax (on the gain) since I already own 2 properties, and am selling 1 of them off (even though I am investing the entire amount into property 3)?

    All properties mentioned here are flats in Mumbai.

    Mathematically (numbers arbitrary),

    I paid 8 lakh for property 1 in 1987 - I stay here, property in my name.
    I paid 5 lakh for property 2 in 1997 - Mother stays here, property in my name.
    I am selling property 2 in 2015 for 1 cr. Net gain (excluding indexation) would be 95 lakh (with indexation and inflation this comes to around 88 lakh (assumed).

    I am investing directly the 1 cr that property 2 fetched me today into property 3 - which costs me 3.5 cr. The remainder 2.5 cr will be paid by me in the form of a loan. Property 3 would be in my name.

    The question I thus have is that will I be liable for a tax of 20% of 95 lakh (which would be the tax on capital gain on account of owning 2 properties) - even though I am investing entirely the amount into a ready to move into flat (property 3)

    I am getting conflicting answers - some people mention that taxation on account of multiple properties has just been recently introduced, while others are saying that since I am "moving" from 1 place to the other, I may not be liable. The common consensus is that I will not be liable for long term capital gains since I am reinvesting any gains into property, but need to check on account of owning more than 1 property.

    I would be very obliged if someone could share their insights!

  2. Parul_Gupta

    Parul_Gupta Active Member

    You are selling a residential property and purchasing a residential property.

    In such cases, Section 54 is applicable and exemption under Section 54 can be claimed irrespective of the no. of houses claimed by you.

    Therefore, the capital gains arising on the sale of Property 2 would be exempted from tax if reinvested in Property 3.

    Only check Section 54 and when asking anyone about this query - just ask them if you can avail exemption under Section 54 and everyone will say - Yes, you can avail exemption
  3. Varun D

    Varun D New Member

    Thank you for your prompt response. Much appreciated.

    To add to your response, I have asked multiple CAs, and a few brokers as well. The answer I received from a majority of folks was similar to yours. However, what spooked me was that a minor few of them mentioned that the government has recently introduced a tax liability on account of owning more than 1 residential property, irrespective of whether you re-invest into another residential property - and one has to read into the fine print (which can be interpreted in different ways).

    Since I am in the process of proceeding with said transaction, I am worried that I will be liable to pay tax for the next financial year (even though I have re-invested gains) into another residential property and would thus accordingly have to make arrangements for the tax liability (as gains are high - thus amount is high).

    Is there anything specific I can do to get this clarified ?

    Thanks again
  4. Amit Sahni

    Amit Sahni Active Member

    The restriction on owning more than 1 property is under Section 54F and not under Section 54.

    Section 54F is applicable if the asset sold is a residential plot whereas Section 54 is applicable the asset sold is a residential house.

    you can read these sections yourself for more clarity
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