Transfer of capital asset to 2 partners

To transfer a real estate asset from a partnership firm (PF) to two existing partners before new partners enter, note the following under the Income Tax Act:

1. Section 45(4): If a PF transfers a capital asset to its partners, it triggers capital gains tax for the PF, calculated on the fair market value (FMV) of the property at the time of transfer.

2. Section 9B: This section deems transfers of assets to partners as taxable events for the firm, meaning LTCG will apply even on asset distribution.

Options:

• 
  Direct Transfer to Partners: The PF can transfer the asset directly to the two partners, but this will attract LTCG based on the FMV.
• 
  Firm Dissolution: Dissolving the PF and distributing the asset to partners is another option, but it will also incur LTCG.

For detailed, personalized advice, consider a phone consultancy.

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Shubham Goyal

To transfer real estate from your partnership firm (PF) to the two existing partners without triggering Long-Term Capital Gains (LTCG), the following approach may be considered. However, please ensure that your CA or legal advisor reviews this, as tax laws can be complex, and detailed documentation is crucial.

1. Dissolution or Reconstitution of the Partnership Firm

• 
  Dissolution Route: If the partnership firm dissolves, the real estate can be distributed to partners as part of the dissolution process. However, this could attract capital gains tax if not carefully structured, as dissolution is typically seen as a “transfer.”
• 
  Reconstitution Route: Alternatively, reconstituting the firm, with the other partners exiting and transferring the real estate to the two remaining partners, could be a smoother way to handle this transfer. This may allow the firm to avoid recognizing a taxable transfer.

2. Capital Account Adjustment

• The property can be distributed to the two partners by adjusting their capital accounts, meaning they receive the property in proportion to their shareholding. This can be recorded as a withdrawal or distribution of assets, which may help avoid capital gains if handled properly within the reconstitution.

3. Stamp Duty Implications

• Transferring real estate from a firm to individual partners may also attract stamp duty. It’s important to confirm with local authorities to understand the applicable stamp duty and registration fees in your jurisdiction.

4. Documentation

• 
  Drafting a Reconstitution or Dissolution Agreement: This agreement should detail the asset distribution and ensure it aligns with tax laws to prevent any tax liability.
• 
  Valuation Report: A valuation report for the real estate asset may help substantiate the capital account adjustment.

Thanks
Damini
Witcorp India Advisors LLP