As we pass through different life stages, our needs and requirements also change, compelling us to maybe change our existing home. For instance, today you have a growing son who is 13 years old, and your existing 1 BHK flat may no longer be enough to meet your increasing needs. Besides, career prospects may also compel you to change your location. As a result, you may face a situation, which entails simultaneous sale and purchase of property. Such a situation requires proper planning in terms of budget, tax implications, interim arrangements and document control.
Here are a few pointers that will help you make the transition to your new abode smoothly:
Arrive at a budget for your new home
The foremost step is to estimate the proceeds you expect from the sale of your existing home and how much are you willing to allocate to the purchase of your new home. Are you willing to add on to the sale proceeds or is the sale proceeds equivalent to the new home purchase budget? This is a question that you need to ask yourself. Further, you need to keep a margin on these proceeds as the transactions may not work out as planned.
Engage the services of a broker
There are a number of good reasons to use a broker:
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Brokers save your time, energy and costs in finding you a suitable property.
They help you find a house specifically looking at your needs. You may never come across a sale of a house not advertised for by the owner, without the help of your broker.
They can inform you about the locality and the type of people residing there, which you may be unaware of.
They help you with regulations such as payment of stamp duty, registration, etc.
They help you find lenders, giving you insights about their requirements and helping you fit into their eligibility norms.
Most of all, they help you negotiate terms with the seller and close the deal.
Ensure that the broker you employ is of good repute and well-experienced. It would be advisable to hire the same broker for both the transactions - you may get a better bargaining power as far as the brokerage is concerned. Besides, it will also put pressure on broker to be more loyal in advising appropriate proposals.
Be aware of the tax implications
While computing the sales proceeds at your disposal to fund the purchase of your new home, be aware of the tax implications. This is because without proper planning, you may incur a tax burden that may derail your financial plans.
Any profit arising from the sale of property is taxable as capital gains tax. If the property is sold within 36 months of its purchase, it is subject to short-term capital gains tax. Long-term capital gains tax is liable if the property is sold on or after 36 months of its acquisition.
Long term capital gains on sale of your house can be set off against any long term or short term capital loss incurred on other investments or any capital loss carried forward from the previous years. If there is no such loss available, you will have to pay tax on your gains at the rate of 20% with indexation benefit.
Short-term capital gain earned can be set off only against any short-term capital loss incurred during the same Financial Year or any carried forward short-term capital loss. If the carry forward loss is lesser than the gain or there is no loss to set off, you will have to pay tax at the rate applicable to you on the capital gain on sale of your property.
Tax rate on short-term capital gain is the personal income tax rate applicable to you, taking into account all your income and using the tax slabs in the Income tax Act 1961, to work out tax payable.
In case of loss:
Tax aspects of long-term capital loss
In case of a loss on sale of your house, you can set off this loss only against any long-term capital gain you may have earned during the same Financial Year on investments that are not liable to Securities Transaction Tax (STT). If the amount of gain on these other investments is lesser than the capital loss incurred on sale of your house or there is no other capital gain, you can carry forward this loss for a period of 8 Assessment Years. Assessment Year (AY) is the year immediately following a Financial Year. For instance, for FY 2001-02, the AY is 2002-03) to be set off against future losses.
Tax aspects of short-term capital loss
Short-term capital loss can be set off against long-term or short-term capital gain, if any earned during the same financial year. If there is no such gain, you can carry forward this loss for setting off against any future capital gain for a period of 8 Assessment years.
Investment of house sale proceeds
There could be a possibility that there is a time lag between the sale and the purchase of your second home. To ensure that there is no erosion in this capital, ensure that you park these funds in avenues that are relatively less risky. Further, since you are simultaneously on the lookout for a new property, ensure that the investments are relatively liquid with negligible costs attached. In fact, to avoid paying any long term capital gains tax, you can make use of section 54EC. As per this section, if within 6 months from date of sale of your residential house, you invest the whole or any part of the capital gain in bonds of the National Highway Authority of India (NHAI) or bonds of the Rural Electrification Board (REC) and hold onto the bonds for more than 3 years, you are free from any tax liability.
Taking advantage of section 54
If you are able to channel the sale proceeds into the purchase of your new home within 2 years from the date of sale, then, your long term capital gains attract no tax, provided you do not sell your new home within 3 years from the date of purchase.
Interim stay
The sale of your existing house and the possession of a new one may not happen at the same time; there may be some time lag. As the estimate time lag is not known you need to plan your interim stay well in advance. Explore the possibility of staying with family, friends or relatives. If the deal takes more time than expected, you may switch to a service apartment, rented accommodation or in worst scenario, a hotel, which may be a costly proposition. Weigh your options beforehand and plan accordingly to save yourself from any unnecessary liabilities, which may also disrupt your financial plans.
Document control
It is important that you keep all the documents well organized and in a secure place. Try and keep photocopies. It is quite likely that you may misplace important papers, especially as you would be handling too many things at one time…Prepare and maintain separate files for all important documents related to the sales and purchase. Keeping documents properly filed always helps in case you need them urgently at a later stage, for tax and accounting purposes as well as for any unfortunate disputes.
Note: All tax implications are as per Union Budget 2009, applicable for financial year 2009-10.