How Long Do You Have To Buy Another House To Avoid Capital Gains (And Why)?

Exact Answer: 2 Years

According to the Income-tax Act, 1961, every income applicable to tax should be shown under separate heads of incomes, like, income from salary, income from house property, income from capital gains, income from other sources, etc. Thus it is necessary to understand which income should be classified under which head of income to ensure that one can take advantage of any exemptions or deductions available for paying tax (if any) applicable to the taxpayer.

Capital gains can be defined as an increase in the value of an asset in comparison to the asset’s historic cost or purchase price which is realized by a person when that particular asset is sold off. Such a type of capital gain might either be short-term or long-term.

How Long Do You Have To Buy Another House To Avoid Capital Gains

How Long Do You Have To Buy Another House To Avoid Capital Gains?

ConditionsDuration
Another house being bought to avoid capital gains2 years
Another house being constructed to avoid capital gains3 years

Every type of income is applicable to tax as every citizen has to pay taxes to the government on the income earned by him. When an asset is sold for at an amount higher than what you had paid for it. i.e at a profit, a capital gain is attracted.

Such a type of capital gain is charged to tax in the year in which it is earned. An investment in house property is most sought after by many individuals as they are mostly guaranteed to give positive returns. House property for income tax purposes is a capital asset and thus profit on its sale is a capital gain.

Therefore, one needs to pay applicable tax on the profit realized on the sale of the house. However, some people sell the house property to buy another new house. In such cases where another house is bought within a certain period, one can avoid capital gains due to the sale of house property and save on tax applicable to the realized profit on the sale.

According to the provisions of the Income-tax Act, if another house property is bought within 2 years by using the entire capital gain realized from the sale of a previous property, then there is no tax to be paid on such a type of capital gain. Also, if one intends to construct a house instead of purchasing, from the money realized as capital gain, then also tax is not be paid if the house is constructed within 3 years to avoid capital gain and tax applicable thereon.

Why Does It Take So Long To Buy Another House To Avoid Capital Gains?

House property is one of the most lucrative and probably the most expensive investments one makes for themselves. It can be a person’s biggest purchase in one’s entire lifetime. Investment in real estate is often advantageous as they generally appreciate over time and help in yielding profitable returns.

However, one might also be required to sell their biggest purchases some or the other day when they are looking for a new home or changing their location, etc. In such a situation, when one sells their house property intending to buy another one, the government provides certain tax benefits to such individuals.

Capital gains occur when one sells their house for profit. Such a gain is charged to tax and thus, the taxpayer has to pay the applicable tax on the gain so realized. However, if the seller buys a new house within 2 years after the sale and the entire gain of that transaction has been utilized to buy another house property, then tax on such gain is exempted.

Another reason for a person to sell their house might be to construct a new house for themselves to live in. As this is also similar to the previous case with the only difference being that the new house is being constructed and not bought with the amount of gain of the sale of a previous property, the government has allowed 3 years for the construction of the new house to avoid capital gain.

Conclusion

When a house property is sold at a market price that is generally higher than its original cost, the income is classified under capital gains. Capital gain is the difference between the purchase and selling price of an asset. Property owners have to pay capital gain taxes as the sale of house property typically results in huge profits for the owner.

However, as per the Income-tax Act, one can avail of certain benefits subject to fulfillment of certain conditions. As per the provisions of the Act, if a person purchases a new house within 2 years or constructs a new house within 3 years after the sale of previous property and utilizes the entire amount of gain for the aforesaid tasks, then such a person can avoid paying tax on the capital gain.

References

  1. https://www.sciencedirect.com/science/article/pii/S0094119007000757
  2. https://apo.org.au/sites/default/files/resource-files/2016-04/apo-nid63429.pdf


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