I have 2 flats, one bought in 2014 and the other in 2018. Can I sell both the flats and invest the combined amount into one property of equal value and avoid capital gains taxes.

Ans: Hi,

I am presuming that you want to clarify if the capital gain tax be avoided if the reinvestment of old 1BHK flat sale could be mapped against purchase of 2 BHK flat.

The reinvestment conditions specify that you could off-set the capital gain arising out of sale of a residential property by purchasing or constructing a new house within the stipulated timeframes.

If you have bought a ready possession property (new flat) then the timelines are 1 year back or 2 years forward from the date of sale of the old flat.

If you have bought an under construction flat then the timelines are 3 years forward from the date of sale of the old property.

An example would be as follows:

Purchase of 2BHK flat is say June 1, 2022 and date of sale of 1BHK is say May 1, 2023 - You could map the capital gains from 1BHK against the purchase of 2BHK ready possession flat. Similarly, if the purchase of the 2BHK flat was at anytime after May 1, 2023 but within 2 years from this date, then again the exemption would be allowed.

In the case of under construction property, all payments made to the builder after May 1, 2023 would be allowed upto a period of 3 years

Ans: Taxable capital gain is the net amount of gain earned from all the capital asset. Thus, Capital gain from 1 capital asset can be set off against loss from another capital asset.

Section 54 provides that in case person transfer house property and invest gain amount in acquiring new property, capital gain will be exempt. So you can invest net capital gain in new property within specified time limit.

Person must buy the residential house property 1 year before or 2 years from date of such transfer of property or construct the house property within 3 years from date of transfer of property.

Ans: Selling your only residential property and reinvesting the capital gains can be a significant financial move. It’s important to understand the implications and evaluate your options carefully. Let's break down your situation and explore the best strategies.

Understanding Capital Gains
When you sell a property, the profit you make is termed capital gains. If you’ve held the property for more than two years, it’s considered a long-term capital gain. Long-term capital gains attract a lower tax rate compared to short-term gains.

Tax Implications and Benefits
Section 54: Under Indian tax laws, specifically Section 54, you can save tax on long-term capital gains by reinvesting in another residential property. This exemption is available if you purchase another residential property within two years or construct a new one within three years from the date of sale.

Reinvesting in Multiple Properties: Previously, the exemption under Section 54 was available only for one property. However, recent amendments allow you to invest in two properties, provided the capital gains do not exceed Rs 2 crores. This benefit is available only once in a lifetime.

Evaluating Investment Options
When considering multiple properties or types of properties such as apartments, individual houses, or farmhouses, you need to evaluate several factors:

Residential Properties
Apartments: Investing in multiple apartments can diversify your portfolio. Apartments often come with amenities and can be easier to rent out, providing regular income.

Individual Houses: These can appreciate more over time compared to apartments. They offer more privacy and can be customized according to your preferences.

Non-Residential Properties
Farmhouses: Investing in a farmhouse can be lucrative if you plan to use it for leisure or agri-business. However, farmhouses generally have lower liquidity and can be harder to sell quickly compared to residential properties.

Benefits and Drawbacks
Advantages:

Diversification: Spreading your investments across multiple properties can reduce risk.
Rental Income: Multiple properties can generate steady rental income, enhancing your cash flow.
Appreciation: Real estate generally appreciates over time, providing capital gains in the future.
Drawbacks:

Liquidity Issues: Real estate is not as liquid as other investments. Selling properties can take time.
Management: Managing multiple properties can be challenging, especially if they are located in different areas.
Market Risks: Real estate markets can be volatile, and property values can fluctuate.
Alternative Investment Strategies
Instead of reinvesting solely in real estate, consider diversifying into other investment avenues. Here’s a more comprehensive look:

Mutual Funds
Mutual funds offer a range of benefits:

Equity Mutual Funds: These funds invest in stocks and have the potential for high returns. They are managed by professionals who actively select and manage the investments, aiming to outperform the market.

Balanced Funds: These invest in a mix of equities and fixed-income securities, providing a balanced risk-reward profile.

Debt Funds: These are safer and invest in government securities, corporate bonds, and other fixed-income instruments. They offer stable returns with lower risk.

Advantages of Mutual Funds:

Diversification: Spreading investments across various assets reduces risk.
Professional Management: Expert fund managers handle the investments, ensuring better returns.
Liquidity: Mutual funds can be easily converted to cash, providing flexibility.
Compounding: Over time, returns from mutual funds can significantly grow due to compounding.
Systematic Investment Plan (SIP)
SIP: Investing through SIPs allows you to invest small amounts regularly. This helps in averaging out the cost of investment and reduces the impact of market volatility.

Benefits of SIP:

Discipline: Encourages regular savings and investments.
Compounding: Regular investments grow significantly over time due to compounding.
Flexibility: SIPs are flexible and can be started or stopped as per your convenience.
Risk Management and Diversification
Insurance: Ensure you have adequate life and health insurance. This protects your family financially in case of unforeseen events.

Emergency Fund: Maintain an emergency fund covering 6-12 months of expenses. This fund will help manage unexpected expenses without disrupting your investments.

Your proactive approach to managing your finances is commendable. Selling your residential property and considering reinvestment options shows your dedication to securing a better future. It's essential to evaluate all options carefully and make informed decisions.

Planning for Long-Term Goals
Child’s Education: If you have children, start a systematic investment plan (SIP) dedicated to their education. Investing in equity mutual funds can help build a substantial corpus for this goal.

Retirement Planning: Building a retirement corpus is crucial. Aim for a diversified portfolio that balances risk and returns. Regular investments in mutual funds can help achieve this goal.

Evaluating Non-Performing Policies
If you hold LIC, ULIP, or other investment-cum-insurance policies, assess their performance. These policies often come with high fees and low returns. Consider surrendering them and reinvesting in mutual funds for better returns and more flexibility.

Regular Review and Rebalancing
Regularly review and rebalance your portfolio. This ensures your investments align with your goals and risk tolerance. A certified financial planner can help you with this process.

Final Insights
Reinvesting the capital gains from selling your residential property requires careful consideration. While investing in multiple properties can diversify your portfolio, exploring other investment options like mutual funds can provide better returns and flexibility. Ensure a balanced and diversified portfolio to achieve your financial goals.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in

Ans: You have to invest in one house only to take benefit u/s 54.