Tax Planning with regard to Sale of Family Property and subsequent sharing as per agreed ratio

Tax planning 119 views 2 replies

Raja Krsnan

Self Employed - Stock Futures Trader Tr

25 Points Joined February 2016

Our family property is held in the name one person, that is me. There is a memorandum of understanding between me, two brothers and our mother. Our shares are equal. 25% each.

We had two properties. One property was old in June 2016. The proceeds were invested fully in the current property. the construction stated in January 2017 and completed in January 2020. We had put the sale proceeds from the first property in a Capital Gains account with a bank which given us tax relief and used it for construction by providing bills while withdrawing from the account. All the funds were exhausted by December 2019 and construction completed in January 2020.

f we now decide to sell the newly constructed property in the next one or two years and want to divide the sale proceeds according the agreed ratio, that is 25% each, what will be the tax implication? Will the other 3 person also have to pay tax when they receive their share of proceeds in the family property? If we do not want to pay the capital gains tax what tax planning needs to be adopted?

Replies (2)

Eswar Reddy S

CFO- at NHTF

58275 Points Joined August 2012

The capital gain is taxable in their hands also in the ratio of 25%

Nandakumar K Konkar

Partner

246 Points Joined April 2009

From your query, I gather that basically you wish to sell the new house constructed from proceeds of sale of earlier 'family (ancestral property) house & want to know tax implications in hands of family members. Here, you have mentioned that property is held in one name, i.e, yours & there is a MOU in family members that shares of 4 members are equal (25% each). But assuming that new property is in your single name, your mother & 2 brothers shall not have any share in sale proceeds, since name on property card is only yours. You have 2 alternatives: (a) Add names of your mom & bros on property card before sale since 1st house was ancestral (this may be preferable option) or (b) Sell new house in your single name & give 25% share of sale proceeds as gift to each family members, which shall be tax exempt as gift to relatives, in which case entire LTCG shall be yours.

You will also have to ensure that sale of new house is made 2 years after completion to qualify as long term capt gains, since there are no deductions available to short term capt gains. Professional advice may be taken.