Managing Capital Gains Taxes While Transferring Properties

You cannot avoid tax on short-term capital gains. However, you can claim deductions to lower the tax liability on long-term gains.

Long-term capital gains from selling a house get tax exemption if they are invested in buying or building a new house. The new house has to be bought one year before the transfer of the first house or within two years after the sale. The deduction allowed is equal to the actual investment or the capital gain, whichever is lower.If you plan to use the gain to build a house, it has to be done within three years of the sale of the property. When you buy a plot to build a house, the cost of land is included in the construction cost. Even buying an under-construction property entitles you to tax deduction, provided its construction is completed within three years of the transfer of the first property. If the new property is sold within three years of purchase or construction, the deduction is reversed and taxed as short-term capital gain.So if you purchase a new house for Rs 15 lakh and claim a deduction of Rs 10 lakh,the exempted amount will be deducted from the purchase cost for calculating the capital gain in the next three years (Rs 15 lakh-Rs 10 lakh). Now suppose you sell this house after two years for Rs 25 lakh. Your capital gain will be Rs 20 lakh (Rs 25 lakh-Rs 5 lakh), even though the actual appreciation is only Rs 10 lakh. If you buy an under-construction independent house and resume construction, the cost incurred in further construction will also be eligible for tax exemption under Section 54 of the Income Tax Act. Read more of this post