- Date : 29/06/2023
- Read: 3 mins
Discover the tax treatment when selling a house property received as alimony. Learn how to save taxes and protect your financial future.
- Divorcees receiving house property as alimony should understand the tax implications.
- Capital gains on the sale of alimony property determine the taxable amount.
- The holding period determines if gains are treated as long-term or short-term.
- Divorcees can save tax by reinvesting capital gains in another residential property.
Divorce can significantly change an individual's financial situation, including the division of assets. Sometimes, a divorced individual may receive a residential house property as part of the alimony settlement. In such circumstances, the transfer of such property does not attract immediate tax liability. In contrast, the subsequent sale of the property may have tax implications.
While this arrangement helps ensure financial stability, let’s understand the rules for income tax on the sale of property.
Calculating tax on capital gains on property sales
When a divorcee decides to sell a residential property received as alimony, the taxable amount is not the total sale consideration but the capital gains made from the sale. Capital gains are calculated by subtracting the property cost from its selling price.
However, when the seller hasn't paid for the property, like in gift or inheritance situations, the cost is determined by the amount paid by the previous owners.
Determining the holding period of the alimony property
The property's holding period determines if it is a short-term or long-term capital asset. The combined holding period is calculated from the date the property was initially acquired for consideration. If the total holding period of the sold property is 24 months or more, the profits from its sale will be liable to tax as long-term capital gains.
While the previous owner(s) ' cost and holding period are considered, the indexation benefit may not be available from the original buyer's purchase date. However, some high courts have held that indexation benefits can be claimed from the date the property was acquired for consideration.
Also Read - Can you adjust capital losses against capital gains for tax calculations?
Applying the appropriate tax rate
Classifying property received as alimony as either a short-term or long-term asset determines the tax rate applicable to capital gains from its sale. Long-term gains are taxed at 20% (plus surcharge and cess).
To conclude - strategies for tax savings
To minimise the tax liability on the sale of a house property received as alimony, a divorcee has specific options. Under Section 54 of the Income Tax Act, they can claim an exemption if they invest the indexed capital gains in purchasing or constructing another residential house property within a specified period.
Alternatively, they can invest the capital gains in capital gains bonds of specified financial institutions within three years from the date of property sale, subject to a maximum limit of ₹50 lakhs per year.
Find the latest articles about my family here.
Related Article: Bought and sold shares within a year? Understand the tax implications of short-term capital gains.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.
- Divorcees receiving house property as alimony should understand the tax implications.
- Capital gains on the sale of alimony property determine the taxable amount.
- The holding period determines if gains are treated as long-term or short-term.
- Divorcees can save tax by reinvesting capital gains in another residential property.
Divorce can significantly change an individual's financial situation, including the division of assets. Sometimes, a divorced individual may receive a residential house property as part of the alimony settlement. In such circumstances, the transfer of such property does not attract immediate tax liability. In contrast, the subsequent sale of the property may have tax implications.
While this arrangement helps ensure financial stability, let’s understand the rules for income tax on the sale of property.
Calculating tax on capital gains on property sales
When a divorcee decides to sell a residential property received as alimony, the taxable amount is not the total sale consideration but the capital gains made from the sale. Capital gains are calculated by subtracting the property cost from its selling price.
However, when the seller hasn't paid for the property, like in gift or inheritance situations, the cost is determined by the amount paid by the previous owners.
Determining the holding period of the alimony property
The property's holding period determines if it is a short-term or long-term capital asset. The combined holding period is calculated from the date the property was initially acquired for consideration. If the total holding period of the sold property is 24 months or more, the profits from its sale will be liable to tax as long-term capital gains.
While the previous owner(s) ' cost and holding period are considered, the indexation benefit may not be available from the original buyer's purchase date. However, some high courts have held that indexation benefits can be claimed from the date the property was acquired for consideration.
Also Read - Can you adjust capital losses against capital gains for tax calculations?
Applying the appropriate tax rate
Classifying property received as alimony as either a short-term or long-term asset determines the tax rate applicable to capital gains from its sale. Long-term gains are taxed at 20% (plus surcharge and cess).
To conclude - strategies for tax savings
To minimise the tax liability on the sale of a house property received as alimony, a divorcee has specific options. Under Section 54 of the Income Tax Act, they can claim an exemption if they invest the indexed capital gains in purchasing or constructing another residential house property within a specified period.
Alternatively, they can invest the capital gains in capital gains bonds of specified financial institutions within three years from the date of property sale, subject to a maximum limit of ₹50 lakhs per year.
Find the latest articles about my family here.
Related Article: Bought and sold shares within a year? Understand the tax implications of short-term capital gains.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.
