In today's world of skyrocketing real estate prices, the owners stand to gain much from their real estate sales. But it is not always about gain and profits only. Real estate transactions have specific tax implications that can significantly impact your finances if ignored. 

In this blog, you will understand the structure of taxes on selling real estate. It can help you make suitable financial decisions and reduce your tax liability.

What is Capital Gain Tax on the Sale of Property?

A capital gain tax is levied on the proceeds from the sale of real estate after considering the inflation and indexed acquisition cost. Capital gain tax is of two types:

Short-Term Capital Gain Tax

If the property undergoes a sale in less than two years from the purchase date, you are liable for a short-term capital gain. Typically, it is the difference between the selling price and the property's purchase price. The difference amount adds to the individual's income.

Long-Term Capital Gain Tax

The government considers the profit under long-term capital gain if the real estate is sold after 24 months. It levies a taxation of up to 20% depending on various factors.

How to Save Tax for Real Estate While Selling?

Long-term capital gains have an exemption from taxation under Section 54 in the Income Tax Act 1961. It applies to individuals and Hindu Undivided Families (HUF) on selling a house property if:

• The capital gains are invested in other real estate, such as purchasing a property or constructing a new house.
• If the new property is purchased one year earlier than the sale of the property or two years after the old property's sale.
• If the price of the new house is worth less than the sale amount, the exemption applies proportionately. The owner can invest the balance amount in another property within six months under Section 54EC.
• The new house concludes construction within three years of selling the old home.
• The purchased property is situated in India.

Conclusion

Selling real estate is a crucial financial decision. Hence, staying informed about tax laws is essential to get the best returns from your investments. 

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Frequently Asked Questions

1. What are the tax implications of selling real estate property?

The capital gain tax for short-term capital gain is applicable as per the income tax slab of the owner, and for long-term capital gain, the tax payable will be 20%.

2. How is the profit from the sale of real estate property taxed?

Any real estate sale attracts capital gain taxes. If the property undergoes a sale within 24 months from the purchase date, a short-term capital gain is applicable. A long-term capital gain is relevant if it is sold after 24 months. 

3. Are there any exemptions or deductions available for real estate property sales?

Under section 54 in the Income Tax Act, an individual or HUF selling a residential property can claim tax deductions if the capital gains are reinvested in purchasing or constructing another house. 

4. How does the length of property ownership affect the tax treatment of real estate sales?

If the owner has possession for less than 24 months, a short-term capital gain is applicable per the individual's tax slab. And if the ownership surpasses 24 months, a long-term capital gain tax is applicable. 

5. Are there any capital gains taxes applicable to the sale of real estate?

Short-term capital gain is applicable if the property is sold in less than 24 months at an individual's tax slab, while a long-term capital gain is applicable if the property is sold after 24 months and is taxed at 20%.