Long term or short term capital gain on house rebuilt and what cost of acquisition?

Hi,

Hope you are doing well !

1.It will be a long term capital gain. House property was bought/constructed in 1976 and later only the improvement will do.

2.In case of an inheritance, the cost of acquisition should be the cost for which the previous owner who has actually acquired the property otherwise than by inheritance or gift, as increased by cost of improvement made subsequently. Since the property has been acquired by the original owner prior to 1 April 1981, you have an option of taking the actual cost of acquisition or the fair market value of the property as on 1 April 2001 whichever is higher.

The cost incurred in demolition and rebuild of old house will be treated improvement cost and will add to cost of acquisition.

Improvement cost will be indexed only of 2018. But the house property will be considered as long term.

Thanks & Regards,

Payal Chhajed

Hi

Yes, it will be a LTCG.

Cost of demolishment as well as construction shall be considered as cost of improvement. However, for COA, value of land as on 1.4.01 shall have to be determined and indexed accordingly.

Dear Sir,

1) It will be treated as Long term capital Asset.

2) Cost of demolition and cost of reconstruction will be treated as Cost of improvement. Cost of land or FMV whichever is higher as on 01.04.2001 will be considered in respect to Cost of land. In your case, for land indexation will be taken as 2001-02 F.Y. and in respect to Cost of improvement, F.Y. in which construction gets completed.

Thanks

HI,

Cost of new construction can be treated as cost of improvement. The original cost can be cost of aquisition. Both can be deducted from sales.

Thanks

Damini

Since the land is long term asset, the reconstruction will also be a LT Asset. Cost Indexing will be done based on 2001 fair market value of the old house. That plus cost of construction becomes your total cost. While old FMV will be indexed basis index of 2019 divided by 100, the cost of new construction including demolition charges will get no indexation as it will be sold in the very year the construction is completed. Preserve all the invoices for construction.

Hence capital gain in 2019 will be Sale Price LESS 2001 FMV x CII of 2019 ÷ 100 PLUS Cost of New construction. That capital gain will then required to be invested in 54EC Bonds. Being inhereted property, use your and your Wife's HUF so that HUF claims all tax slab benefits and also enjoy Bond interest at low taxability each year until maturity. You can call me should you need more clarification.

Hi, to

The capital gain will be long term.

Yes, the cost of acquisition will include the cost of construction of old house as well.

Capital gains will be long term.yes the construction cost will also be included in your acquisition cost and you can deduct the same from the sale proceeds to compute capital gains.

Regards,

Nikhil.

Your concern is appreciated. There are many cases where AO has denied such exemption and bifurcated the gains into long term and short term I.e. long term for land and short term for building.

There are cases in favor as well as against which makes this point litigative.

To avoid litigation, bifurcation of sales consideration can be done in the sales agreement. Such bifurcation shall be done in such a way so as to reduce the tax liabilities.

We may discuss this further through a private conversation.

As requested.

Please find below the similar case law, go through the same.It will be very helpful for your concern:

Sri. K. Rajendra , Bangalore vs Assessee on 7 August, 2012

IN THE INCOME TAX APPELLATE TRIBUNAL

"B" BENCH : BANGALORE

BEFORE SHRI N. BARATHVAJA SANKAR, VICE PRESIDENT

AND SHRI N.V. VASUDEVAN, JUDICIAL MEMBER

ITA No. 790/Bang/2010

Assessment year : 2005-06

https://indiankanoon.org/doc/105399754/

Thanks & Regards,

Payal Chhajed

Also, please get a clear understanding of case laws. There are various case laws in this context about 54F exemption I.e. purchase-demolition-construction of new property in which capital gains are reinvested.

Hi,

It will be long term capital gain on sale.Any amount incurred on demolition and rebuilding will be treated as cost of improvement.

Cost of acquisition will be fmv as on 1.04.2001 and indexed accordingly.

I have revisited your case and understand there are a lot of case laws which say land and the buildings are to be treated as separate assets, and this fact has been accepted as valid in this country where undivided land is sold separately and the construction separately. However, in all these cases, the assessee was benefiting by considering land and house as separate and not one asset. In your case the if the house is sold to one party, undivided land sale would not come into picture, but there may be litigation later on whether the house amounts to improvement and hence eligible for LTCG or new construction taxable as STCG. Odds against you are higher.

Your case is just the reverse, where the gains from construction may be construed as short term gains not eligible for 54/54EC exemptions, but land anyway will be available as a LT gain to be invested in Bonds/another residential house later. Assuming the gain on the sale of the construction portion is taxable as ST capital gains, what you can do is price undivided portion of land in the agreement to sell at a much higher price and keep price charged for construction separately at a as low a number as possible - this is possible only if you sell units to multiple buyers, and not as a single new house/unit. If single house/unit being constructed on land is sold, then you cannot separate the sale price between land and construction. However, land can be valued by a valuer to evaluate what the price of land is to calculate LTCG on sale of land as part of the whole agreement.

Nevertheless, the maximum amount you can invest in bonds is Rs 50 lakhs, and I'm sure your LTCG would be higher than that. I would need some more details on what you want to build - multiple units, or single unit; how much sale price you are expecting; what's the cost of construction coming to, etc. Also if you are married, you can take this sale amount as your HUF and save some taxes.

The capital gains can be treated as long term. There are many settled case laws supporting the same.

Land will be tested as long term whereas construction will be treated as short term.

Hi,

while calculating the capital gain at the time of selling the above said property.

cost of land & cost of acquisition of house will be considered as long term

while indexation of reconstruction of house would be done from the year of completion. if you keep it for period of two years from its completion , it will also fall under long term. otherwise it is short term.

as per Sri. K. Rajendra , Bangalore vs Assessee on 7 August, 2012,

below are extract from the case..

Remodel : to model again, to make over, to rebuild (b) Renovation : to make new The aforesaid dictionary meaning of the two terms, even if the same are used separately, meaning to construct or to construct something new in case the two words are read jointly, then the same will mean nothing but "building something new."

6. In legal parlance also, the said terms have been interpreted to have the same in "The Law Lexicon" by Justice Y.V. Chandrachud, second Edn. (Report) 2001.

"Construction and reconstruction are interchangeable terms and the only difference is that the phrase "construction" will be used where a new building is put up where none existed before, but reconstruction will apply to a building which is rebuilt in the place of an existing building, but in both these cases there would' be construction. Sadha Singh S. Mulla Singh vs District Board, AIR 1962 Pun 204 (East Punjab Urban Rent Restriction Act 3 of 1949 s. 3)"

Thus, from whatever angle the case is examined, 'remodel and renovation' amounts to construction of house and this is more so in the present case where an altogether new portion has been built after razing old construction, to the ground.

I would suggest to keep the house for period of two years after getting completion certificate to avail long term benefits.

here is the link of the above case law

https://indiankanoon.org/doc/105399754/

Capital Gain will be long term since it will from taken from date it was bought by original owner.

Yes definitely each and every cost incurred for house will be included since it is done to enhance value of asset.

In case of any capital asset which is inherited, the cost of acquisition of the previous owner will be deemed to be the cost of acquisition in the hands of the person who inherited such capital asset. Further, the period of holding in the hands of the new owner would also include the period of holding of the previous owner. Thus, in your case, the property would be deemed to be held by you from 1976 and thus, qualify to be a long term capital asset (since held for more than 2 years). For the purpose of computation of capital gains, the fair value of the property as on 1 April 2001 or the cost of construction in 1976, whichever is higher would be considered as the cost of acquisition in your hands. Such cost would be indexed using the cost inflation index of 2001-02 and the cost inflation index of FY 2019-20 (assuming the sale is proposed in the said year). As regards the new construction cost, the same would be treated as cost of improvement and would be appropriately reduced from the sales consideration.