• Demolish residential property and sell

My father bought a house in Muzaffarpur, Bihar in 1975 for INR 50000. He wants to sell the house now for 70 lacs and buy a flat in Bangalore worth 50 lacs. He wants to keep remaining 20 lacs in Bank without any Tax deduction. However, the buyer is interested in plot only as the house is in dilapidated condition and the buyer is interested in constructing the new house. The buyer does not want to pay the registration/stamp fee for the cost of the house/construction along with the cost of the land.

The current value of property with indexed cost of acquisition is around 20 lacs.

The buyer is insisting on demolishing the house and then getting it registered. However, I am afraid my father will not be able to avail section 54 provision under which only the Capital gain amount needs to be reinvested in residential property. Instead, he will have to reinvest the complete sale proceeds of 70 lacs (section 54F) in buying new residential property to avoid Tax.

Please note that my father has been regularly paying Property Tax, Electricity Bill, Water Bill etc.


Please suggest what are the options available to avoid falling under section 54F?
Asked 12 days ago in Capital Gains Tax from Muzaffarpur, Bihar
Hi,
Please provide the below details.

- Out of 70 lacs, how much is the cost of construction?. 

- Is there any valuation report?

Thanks
Vivek Kumar Arora
CA, Delhi
1637 Answers
48 Consultations

5.0 on 5.0

Since the property was bought in 1975, you will need to get the property valued as on 01.04.2001 by a registered valuer. Hope you have got that done to arrive at the capital gains amount.

As per your inputs, if the buyer is not ready to pay the registration cost then it is a matter of negotiation between your father and the buyer. If your father still wants to sell the property, he may reduce the selling price in order to accommodate for the registration costs that may have to be paid by the buyer. Further, let your father sell the flat and post getting the property registered in his name, the buyer can demolish and reconstruct as he wants.

You can connect with me for further discussions.

Regards,
Nikhil.
Nikhil Khanna
CA, Mumbai
1377 Answers
17 Consultations

5.0 on 5.0

If you want to claim exemption under section 54 only and the only problem is that the buyer doesn't want to pay extra stamp duty for the same you can ask your father to pay the difference stamp duty if the difference is not much.
There is also another option I am thinking using which I think you will fall under 54F but you will not have to invest entire sale consideration.

Hope you find the information helpful if you do please rate it 5 and provide your valuable feedback for my improvement.
Thank you.
Naman Maloo
CA, Jaipur
497 Answers
4 Consultations

5.0 on 5.0

Kindly note that your situation needs factual analysis and hence may have differing views of various professionals. Also, this analysis and position is not free from litigation, but should be acceptable at higher levels. The lower level tax authorities may deem to deny the benefits which you are rightfully entitled to as per the provisions of law.
The income-tax authorities should see the transaction in its entirety and from the perspective of the Tax payer. From your perspective, it is sale of residential house. The house was ultimately demolished at the behest of the buyer and only after the transaction is finalised. If the deal did not have the condition to buy the land post demolition, the house would not have been demolished. Your intention was to sell the house The documents like paying Property Tax, Electricity Bill, Water Bill definitely support the fact that it is a sale of residential flat. Further section 54 provides as under: 
“the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head "Income from house property”
I believe that the income from this house would have been taxed as income from house property in the past tax filings, hence now merely since the property is broken it should not be denied. 
Your agreement with the buyer should show as a purchase of house and as a pre-condition to purchase, the residential house should be demolished for buiding a completely new house on that premise. Further, you should also keep documents to substantiate quote from other third party buyers for sale of house – this would help to justify that the selling as a vacant land was a better deal than selling house. For you it is sale of house and not plot. In fact the expenses incurred to demolish should be taken in account while calculating capital gains ie expense incurred towards sale. 
Just a thought, in case your buyer agrees, you may ask him to take the house with the land and additional stamp duty hit may be taken by you. You may do a cost-benefit analysis with this permutations and combinations. 
 Also, the fact, that you acquired a new flat within the time frame and not like an agreement with the buider to acquire a house in the construction made on that land should substantiate sec54 claim.
Jasmina Jain Shah
CA, Greater Mumbai
82 Answers
1 Consultation

5.0 on 5.0

Hi,

Hope you are doing well !!

It will be fall under section 54 subject to certain litigation.

For safer side, please pay the stamp duty from your end. 

Thanks & Regards,
Payal Chhajed
Payal Chhajed
CA, Mumbai
1002 Answers
8 Consultations

4.8 on 5.0

For claiming exemption u/s 54, your father can pay extra stamp duty on behalf of buyer.
Karishma Chhajer
CA, Jodhpur
541 Answers
3 Consultations

5.0 on 5.0

Hi,

The law clearly states that if house property is sold and investment is made in new residential house property section 54 shall apply and if any other capital asset is sold and investment is made in new residential house property 54F shall apply.

You can have a MOU with the buyer wherein you can reimburse the stamp fee to him so that you can claim benefit of section 54.

Hope your queries are resolved.
Siddhant Shah
CA, Mumbai
101 Answers

5.0 on 5.0

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