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Can I Buy Two Houses to Reduce Capital Gains Tax After Selling One?

T S Khurana

T S Khurana   |197 Answers  |Ask -

Tax Expert - Answered on Jul 29, 2024

A certified management accountant since 1993, T S Khurana is a fellow member of The Institute of Cost Accountants of India. His areas of expertise are income tax, specifically litigation cases, and GST.

Since the last 21 years, he has also been providing expert advice on financial matters, including investments and diversification of funds, and wealth building in the long term to his clients.
He believes that investment in real estate is the safest way for better returns and wealth generation over a period of time.

A former chairman of the Chandigarh Chapter of Institute of Cost Accountants of India, T S Khurana has also served as member of its technical committee.... more
Asked by Anonymous - Jul 10, 2024Hindi
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I have sold one house. Can I invest in two houses to save on capital gains tax

Ans: You have to invest in one house only to take benefit u/s 54.
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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Ramalingam

Ramalingam Kalirajan  |7101 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jul 10, 2024

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Sir, can I invest capital gains after selling my only residential property in more than one apartment or individual house or farm house...
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

..Read more

Latest Questions
T S Khurana

T S Khurana   |197 Answers  |Ask -

Tax Expert - Answered on Nov 23, 2024

Asked by Anonymous - May 11, 2024Hindi
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Can you please suggest on capital gains as per Indian taxation laws arising in the below two queries : 1) property purchased with joint ownership, me and my wife’s name in 2015 at a cost of 64,80,000, housing improvements done for the cost of 1000000 and brokerages of 200000 paid and sold the same property at 10000000 in Dec 2023? 2) 87% of the proceeds got from the deal i.e 8700000, have been reinvested to pay 25% amount in purchasing another joint ownership property in Dec 2023, 3) I have invested in another under construction property in Nov 2023 by taking housing loan, which is on me and my wife’s name worth 1.4 cr, here the primary applicant is me only while wife is just made a Co applicant in the builder buyer agreement and also on the housing loan . So what are the LTCG tax liabilities arising from the above 3 scenarios for FY 2023-2024 and FY 2024-2025. I intend to sale off the property acquired in (2) by Dec 2024 and use that proceeds to close the housing loan for the property acquired in (3), will this sale of property be inviting any tax liabilities if the complete proceeds received from the sale of the property in (2) would be utilised to close the housing loan taken in Nov 2023 for the property in (3) ? Since in FY 23-24, I would be claiming the LTCG from the sale proceeds of 1) invested in the purchase of property in 2), and I intend to sale off this property in Dec 2024, will the LTCG claim be forfeited on the property sale in (1), should I hold this property at least for further 1 year so that sale of this property in 2) will not invite STCG?
Ans: (A). Let's first talk about F/Y 2023-24 :
You jointly sold a Property during the year for Rs.76.80 lakhs (64.80+10.00+2.00), & sold the same for Rs.100.00 lakhs.
You have jointly also purchased Property No.3 (I suppose it is Residential only), for Rs.140.00 lakhs.
You should avail exemption u/s-54 & file your ITR accordingly. Please disclose all details about sale & purchase in your ITR.
02. Now coming to the F/Y 2024-25 :
You intend to Sell Property No.2, which was acquired in 2023-24. Any Gain on Sale of it would be Short Term capital Gains & taxed accordingly.
Alternatively, you may hold this sale of property no.2 (for 2 years from its purchase) & avoid STCG
You are free to utilize the sale proceeds in a way you like, including paying off your housing Loan.
Please note to avail exemption u/s 54 only from investment in property no.3 & not 2.
Most welcome for any further clarifications. Thanks.

...Read more

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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