Selling an under-construction property?

Remember that the property for which you have paid an initial advance is a capital asset subject to capital gains tax.

The continuous rise and fall in property prices over the past few years, particularly in large cities such as Delhi and Mumbai, has kept the property market buoyant. Changing sentiments in the real estate market have placed at least one category of home-buyers in a very fortunate situation—those who booked yet-to-be-constructed properties a few years ago. These buyers have seen the prices of such properties go up as compared to the price at which they were booked. Many property buyers are also often tempted to sell these assets while they are still under construction.

A critical point that most property buyers miss out on is the tax implication on sale of properties that are still under construction. A buyer generally books a property with a builder much before construction is completed. In many states, property registration takes place only when the possession is passed on to the buyer after construction is completed. What most buyers do not know is the fact that a contractual right on an under-construction property is also a capital asset under tax regulation even though the property is yet to be registered in the name of the buyer. So, is the sale of rights on an under-construction property before actually getting possession of such property subject to capital gains tax? The term ‘transfer’ as defined under the Income Tax Act, 1961, (IT Act) is not limited to sale, exchange or relinquishment of a capital asset, but also includes extinguishment of any right in a capital asset which takes place when the owner abandons his rights on the property. Further, ‘capital asset’ is also defined widely to include any ‘property’ and hence rights in an under-construction property can also be regarded as ‘capital asset’. In other words, a fully constructed property which is already registered in your name is no doubt a capital asset. But at the same time, a right to receive possession of an under-construction property booked by the buyer and on which initial advance has been paid is also a capital asset subject to capital gains taxation.

How can the date of acquisition and the nature of capital gain – long-term or short-term be determined?

Yet another issue that arises in the context of transfer of rights in the property under construction is the date of acquisition of the right for the purpose of classifying the capital gain as short-term or long-term capital gain.

The period of holding an asset determines whether the gain is long-term or short-term. The gain arising from transfer of the capital asset held for more than 36 months is a long-term capital gain; otherwise it is a short-term capital gain. For under-construction properties, one view in respect of date of acquisition is that the date of booking of property and/or the date of payment of initial advance would be regarded as the date of acquisition. For example,if you have booked a property in 2010, which is still under construction and you would like to transfer the right on such property in 2014, any gain on such transaction will be considered a long-term capital gain. The other view could be that the right would come into existence only when the property is registered in the name of the buyer and the builder passes on possession of the property to the intended buyer. Indian courts have resorted to both these views at different points in time.

While it is possible to consider the date of booking of property and/or the date of payment of initial advance as date of acquisition, this view could vary depending on facts of each case and the documents executed/ provided by the builder to the intended buyers. In case you are planning to sell your under-construction property in the near future, it would be worth evaluating the tax advantages of selling the right on such property before getting it registered in your name.

Can you plan your taxes by reinvesting this gain in some other property? Long-term capital gains arising from sale of under construction property can be exempt if the sale proceeds are reinvested in specified assets. For example, purchase of residential house property within two years of sale of under construction property or construction of residential house property within three years of sale of under-construction property would make an individual eligible for exemption subject to fulfillment of other conditions.

The tax scenario in respect of under-construction properties is significantly uncertain. Real estate investors should, therefore, tread with caution while investing money in under construction properties. It is important that you explore all planning opportunities and take an informed decision before finalizing the transaction as that may help to reduce your tax burden.

Source: PropertyatNeoDevelopers.Wordpress.Com