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Legal and taxation aspects to consider, before selling a residential property

[] Taxes and legal documentation are important aspects, when it comes to a real estate transaction. We examine these aspects from the point of view of the seller

Selling a home requires as much due diligence as buying one, to ensure that there are no disputes and to get the proper return on investment. While legal and taxation aspects are the two most crucial factors, home owners should also understand the process of execution of the transaction and have an open discussion with the buyer, on who will bear the charges that are incurred during the transaction.

You are reading: Legal and taxation aspects to consider, before selling a residential property

Tax implications of selling a home

If a property is sold within two years of buying (acquiring) it, any profit from the transaction is treated as a short-term capital gain in the hands of the individual. This profit is included in the total income of the owner and taxed as per the slab rate applicable to the individual.

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AS Sivaramakrishnan, head, residential services, India, CBRE South Asia Pvt Ltd adds that “If a house property is sold within five years from the end of the financial year in which it was purchased, the tax benefits claimed are not applicable. Consequently, the tax benefits that were claimed earlier (such as the tax deduction claimed for principal repayment, stamp duty and registration under Section 80C), will have to be reversed and the amount becomes taxable in the year of sale. Only the deduction on interest payment, under Section 24B, is left untouched.”

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It is also mandatory for the buyers to deduct TDS at 1%, when the property is worth more than Rs 50 lakhs and submit Form 26QB to the Income Tax (I-T) department. This payment has to be made on behalf of the seller and is linked with the Permanent Account Number (PAN) of the seller. The seller must obtain the TDS certificate from the buyer. In case of loss on the sale of the property or claiming exemptions from long-term capital gains tax, the seller can claim a refund for TDS on the tax return, by providing the relevant details.

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The seller can also claim exemption from long-term capital gains tax under Section 54 EC if he/she, within six months of transfer of the property, invests the capital gains (up to a maximum limit of Rs 50 lakhs) in long term bonds notified by the government of India, such as the National Highways Authority of India and Rural Electrification Corporation Limited, for a minimum period of three years.

Kalpesh Dave, head – corporate planning and strategy, Aspire Home Finance Corporation Ltd (AHFCL), lists some important legal points to keep in mind, while selling a home:

  • “It is advisable to enter into a memorandum of understanding (MoU) with the buyer at the beginning (although it is not enforceable), which contains the details of the proposed transaction and the liability of each party.
  • The sale agreement should be prepared by a legal expert and needs to be reviewed thoroughly, to avoid any issues/litigation in future.
  • The sale agreement contains the clauses for handover of the property and the same has to be respected in letter and spirit. Any delay in doing so, is illegal and is liable for prosecution in a court of law.”

Home owners can also prepare a list of the documents pertaining to the property with the help of an expert and make copies of the same, which they can show to prospective buyers. Experts add that sellers should also be aware of the prevailing market conditions and evaluate if it is the right time to sell your home. If you decide to sell the house, ensure that it is painted and in good condition, as it will be more appealing to prospective buyers.

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Category: Must Knows

Debora Berti

Università degli Studi di Firenze, IT

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