How To Save Tax On The Sale Of Residential Property? Know How To Save Full Tax
Currently, a large number of taxpayers are not aware of the provision of the Income Tax Act that provides their tax benefits on the sale of residential properties when they decide to sell them. Landlords make money from selling residential property, and they pay taxes on that money.
A capital gain occurs when a property is sold for a profit. If sold after 24 months, capital gains are referred to as long-term; if sold right away, they are referred to as short-term. Short-term gains are not tax-free, but capital gains from long-term investments are.
Although capital gains are taxed at a rate of 20%, there are ways to invest to avoid paying the whole amount of tax.
Here, section 54 enters the picture. It is possible to lessen the tax burden on residential properties by taking advantage of provisions contained in Section 54 of the Income Tax Act.
In order to comply with the tax laws of the state or country, landlords take the help of a residential property management company which is knowledgeable of the tax laws of the country or state and that files taxes on behalf of the owner.
In general, if you choose to outsource your residential property management to a professional, all expenses related to paying the property manager are typically tax deductible.
Let us discuss the factor that determines the tax on the sale of residential property
1. Property Cost
The cost of the property comprises every expense related to the asset, including brokerage fees, stamp duty, registration fees, and money spent on renovation and maintenance. Consequently, the total cost of a property includes the price paid for it as well as the total amount spent on improvements.
2. Payment Of Cash For A Property Improvement
During the process of calculating the capital gain tax due on the sale of a residential property, you can add the amount used for renovations to the overall cost of the property to determine the capital gain tax due. It’s easy to calculate maintenance costs and financial info with a real estate property management company.
3. Period Of Holding For Capital Gains
You have to consider a lot of factors when deciding your tax liability. In other words, you need to consider the period of time during which the property was in your possession. Suppose the law deems that the sale of a piece of the property falls under the category of short-term capital gains, then the amount of tax due will be much higher.
4. Investment in new property
Your tax obligation will be very low if you use the proceeds from the sale of an existing property to buy a new one within a specific time frame and under specific conditions.
5. Property ownership
The seller’s tax liability will be higher if they own several properties. The tax burden will be less for a person who owns just one property.
How To Save Capital Gains Tax On Property Sale?
Here are some options for sellers to save capital gains tax.
1. Constructing a new property
Using the long-term capital gains from selling the old residential property into buying or constructing a new one could successfully exempt the capital gains under section 54.
2. Time Constraint
There is a time constraint set by the laws for tax exemption in case of purchase of a new house or property. To comply with the law, a new house must be purchased within a year of the sale of the old one. To qualify for the tax exemption, the new property must be purchased within two years of the sale of the old property.
3. Investing In Two Houses
You can invest in two properties with a residential property management company. However, the long-term capital gain cannot exceed Rs 2 crore if you invest in two residential properties under Section 54.
4. Depositing in Capital Gain Account
The owner may deposit the money in a capital gain account if they do not invest the capital gain before the return filing deadline and the period specified in the income tax laws has not yet passed. This bank account may be opened at any bank that is included in the 1988 Capital Gains Account Scheme, including public sector banks.
Conclusion
As a property owner, you have many options under the Income Tax Act to save taxes when selling your residential property. However, it is important to understand that Capital Gains Tax can be quite difficult to deal with if one is not prepared to deal with it using the proper methods.
As a result, you should conduct all of your research ahead of time in order to minimise the impact of this tax or take help from a real estate property management company.