Ltcg incurred on sale of a property
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
07 December 2012
I am in the process of selling my flat in Chennai. Can I use the sale proceeds to buy a house owned by my mother to avoid paying tax on the LTCG incurred on the sale? The Market value of each of these properties may differ, mother’s property being higher in ground space& building value and I do not have the extra funds to compensate the sale. Would or can government object to such transaction? In anycase she was going to do a settlement deed to transfer the property in my name.
Grateful for your expertise and guidance on the above….Thanking you….CS
Grateful for your expertise and guidance on the above….Thanking you….CS
07 December 2012
There is no restriction on getting exemption if you purchase property from your mother.
However, the only problem is that you are buying it at the cheaper price as compare to mkt value due to shortage of funds in such cases assessing officer has right to refer the valaution to valuation officer if fair market value of the asset exceeds the value of the asset as claimed by the assessee by more than such per centage as specified.
However, the only problem is that you are buying it at the cheaper price as compare to mkt value due to shortage of funds in such cases assessing officer has right to refer the valaution to valuation officer if fair market value of the asset exceeds the value of the asset as claimed by the assessee by more than such per centage as specified.
07 December 2012
If the difference between the fair mkt value and purchase price is more than Rs. 25000 or 15% of purchase price then assessing officer may refer for valuation to valuation officer.
One more thing is that, your mother may liable for capital gain on transfer of capital asset.
One more thing is that, your mother may liable for capital gain on transfer of capital asset.
Querist : Anonymous
Querist :
Anonymous
(Querist)
07 December 2012
Thank You Mr Kedia.....the market guideline value of the property being sold is Rs 12000 per sq ft and a total of 596 Sq Ft is the UDS (6 flats in the area) ....and the guideline value of mother's property is Rs 9000 per sq ft with a uds of 1565(The other half belongs to brother)2 flats in the area.Both buidlings are 37 Years old. I wonder whether there would be nay objections from authorities...THnak you
07 December 2012
Pls tell me the total value paid by you for the property and purchase price of the property bought by you along with the mkt value.
we have nothing to do with sqr feet and all...
we have nothing to do with sqr feet and all...
Querist : Anonymous
Querist :
Anonymous
(Querist)
07 December 2012
Thanks Mr Kedia....here is following
My property that I am selling
Bought the property in 1974 for 166000
Sale Amount in 2012 approx is 6000000
Built up area 825 Sq Ft
Area : Central Chennai Prime location
Mothers Flat Bought in 1993 - 525000
Todays Value ???????
Built up area approx 1600 to 700 Sq Ft
Area South Chennai Prime location
Both buildings are 37 Years old
Thank you...Rgds...CS
My property that I am selling
Bought the property in 1974 for 166000
Sale Amount in 2012 approx is 6000000
Built up area 825 Sq Ft
Area : Central Chennai Prime location
Mothers Flat Bought in 1993 - 525000
Todays Value ???????
Built up area approx 1600 to 700 Sq Ft
Area South Chennai Prime location
Both buildings are 37 Years old
Thank you...Rgds...CS
03 August 2024
To address the situation regarding the sale of your flat and the potential use of the sale proceeds to buy a property owned by your mother, let's go through the relevant considerations and options for avoiding Long-Term Capital Gains (LTCG) tax:
### **Key Considerations**
1. **Exemption Under Section 54 of the Income Tax Act:**
- **Section 54** allows for exemption of LTCG if the proceeds from the sale of a residential property are used to purchase another residential property.
- The new property must be purchased within 1 year before or 2 years after the date of sale, or constructed within 3 years from the date of sale.
2. **Transaction with Relatives:**
- Buying a property from a relative (in this case, your mother) is permissible, but the transaction must be genuine and at arm's length. The market value of the property is important, and any substantial difference in value between the properties could attract scrutiny from tax authorities.
3. **Value Differences:**
- You mentioned that the market value of your property is Rs. 12,000 per sq ft and the value of your mother’s property is Rs. 9,000 per sq ft. The difference in values could raise questions if it appears that the transaction is structured to avoid taxes.
- To avoid potential objections, ensure that the transaction is conducted at a fair market value and documented properly.
### **Steps and Recommendations**
1. **Fair Market Value Documentation:**
- Obtain a professional valuation of both properties to establish fair market value. This will help in demonstrating that the transaction is genuine and at arm's length.
2. **Settlement Deed:**
- If the intention is to transfer the property from your mother to you, ensure that a proper settlement deed or sale agreement is executed, reflecting the market value and the actual transaction details.
3. **Use of Sale Proceeds:**
- While you can use the sale proceeds to buy your mother’s property, the amount used should be equivalent to or more than the capital gains realized to claim the exemption under Section 54.
- If the sale proceeds are less than the capital gains, you might need to invest the remaining amount in other qualifying residential properties or capital gains bonds under Section 54EC.
4. **Capital Gains Bonds (Section 54EC):**
- If you are unable to utilize the entire sale proceeds for purchasing or constructing a new property, consider investing the unutilized amount in Capital Gains Bonds under Section 54EC to claim exemption on the remaining LTCG.
5. **Consult a Tax Professional:**
- Due to the complexity of the transaction and potential scrutiny by tax authorities, it is highly advisable to consult with a tax professional or a chartered accountant. They can provide specific guidance based on your situation and ensure compliance with all legal requirements.
### **Summary**
- **Transaction with Your Mother:** It is permissible but must be at fair market value and properly documented.
- **Capital Gains Exemption:** You can claim exemption under Section 54 by purchasing or constructing a new residential property. Ensure that the amount spent is equal to or greater than the LTCG to claim full exemption.
- **Market Value Differences:** Be prepared to justify the transaction and ensure it's fair and properly documented.
This approach helps in ensuring that your transaction is compliant with tax laws and minimizes the risk of objections from authorities.
### **Key Considerations**
1. **Exemption Under Section 54 of the Income Tax Act:**
- **Section 54** allows for exemption of LTCG if the proceeds from the sale of a residential property are used to purchase another residential property.
- The new property must be purchased within 1 year before or 2 years after the date of sale, or constructed within 3 years from the date of sale.
2. **Transaction with Relatives:**
- Buying a property from a relative (in this case, your mother) is permissible, but the transaction must be genuine and at arm's length. The market value of the property is important, and any substantial difference in value between the properties could attract scrutiny from tax authorities.
3. **Value Differences:**
- You mentioned that the market value of your property is Rs. 12,000 per sq ft and the value of your mother’s property is Rs. 9,000 per sq ft. The difference in values could raise questions if it appears that the transaction is structured to avoid taxes.
- To avoid potential objections, ensure that the transaction is conducted at a fair market value and documented properly.
### **Steps and Recommendations**
1. **Fair Market Value Documentation:**
- Obtain a professional valuation of both properties to establish fair market value. This will help in demonstrating that the transaction is genuine and at arm's length.
2. **Settlement Deed:**
- If the intention is to transfer the property from your mother to you, ensure that a proper settlement deed or sale agreement is executed, reflecting the market value and the actual transaction details.
3. **Use of Sale Proceeds:**
- While you can use the sale proceeds to buy your mother’s property, the amount used should be equivalent to or more than the capital gains realized to claim the exemption under Section 54.
- If the sale proceeds are less than the capital gains, you might need to invest the remaining amount in other qualifying residential properties or capital gains bonds under Section 54EC.
4. **Capital Gains Bonds (Section 54EC):**
- If you are unable to utilize the entire sale proceeds for purchasing or constructing a new property, consider investing the unutilized amount in Capital Gains Bonds under Section 54EC to claim exemption on the remaining LTCG.
5. **Consult a Tax Professional:**
- Due to the complexity of the transaction and potential scrutiny by tax authorities, it is highly advisable to consult with a tax professional or a chartered accountant. They can provide specific guidance based on your situation and ensure compliance with all legal requirements.
### **Summary**
- **Transaction with Your Mother:** It is permissible but must be at fair market value and properly documented.
- **Capital Gains Exemption:** You can claim exemption under Section 54 by purchasing or constructing a new residential property. Ensure that the amount spent is equal to or greater than the LTCG to claim full exemption.
- **Market Value Differences:** Be prepared to justify the transaction and ensure it's fair and properly documented.
This approach helps in ensuring that your transaction is compliant with tax laws and minimizes the risk of objections from authorities.
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