Tips for investing in a property after selling your property

A homeowner may decide to sell their property based on their personal or financial reasons. The main aim is to obtain sound returns on investment that can be utilised for future investments. Reinvesting the proceeds from the sale in another residential property is a secure investment decision, ensuring long-term benefits. In this guide, we bring useful tips if you are planning to invest in a property after selling your property. 

Identify the right time to sell a property

To get an attractive property deal, it is necessary to sell the property at the most favourable time. In India, demand for properties peaks around festive seasons, such as Akshaya Tritiya and Diwali. Similarly, the tax season, around February and March, sees many anxious taxpayers looking to invest in properties to save tax. The market condition is another factor driving demand for properties, especially when interest rates fall. One is likely to find serious buyers around these phases. Make sure to remain flexible when negotiating prices to close deals successfully. 

Click to read more about the right time to sell your property

Analyse your financial situation 

Just like purchasing a property, selling a property involves significant expenses. To manage these expenses, it is crucial to ensure that you are financially ready to sell the property. The property sale process starts with conducting market research and property valuation to estimate a property’s value in the current market conditions. If you are hiring professional property valuation or legal services, it could involve some expenses. 

Another major expenditure property sellers should gear up for is the cost of home staging. This involves renovating the house and making it ready for potential buyers. Inspect your property and allot a specific budget to cover the repair or renovation expenses. 

Calculate ROI on property

When planning to sell a property, the seller estimates how much profit they will gain from the deal. Estimating the returns on investment (ROI) is a crucial step in the home selling process as it will enable the seller to find the right deal by comparing different offers made by buyers. ROI refers to the percentage of gains from an investment after considering the costs involved. Before calculating the ROI, estimate the various costs involved during the property investment.

Cost of acquisition

• Property cost: The price paid to the seller during purchase
• Stamp duty and registration charges: The charges paid to the state government during property registration
• Brokerage charges: The commission paid to the real estate agent for availing their services
• Home loan costs: The amount spent on the total interest component over the value of home loan

Operational costs

• Maintenance charges: The fee paid to the housing society for the maintenance
• Property tax: The tax paid annually to the municipal authority
• Repair and renovation costs: Costs incurred during the time the property is owned by the individual

Selling costs

• Brokerage charges: The costs incurred for availing the services of the agent to help you sell the property
• Advertisement costs: The charges incurred to list your property online or print ads in newspapers

ROI is calculated as: (Current value of investment – cost of investment/ cost of investment) X 100

Estimate budget for reinvestment

Calculate the net gains after deducting the taxes and expenses. This will help you estimate the right budget for your next property investment. This is the stage when one must relook at one’s finances by considering one’s income, savings, debts, and other financial obligations to set a realistic budget for a house purchase. 

Understand tax implications

Typically, the property is sold with the aim of generating a profit. This profit that a seller generates upon selling the property at a higher value than the purchase cost is known as capital gains. In India, the government imposes a capital gains tax on the profit made from the sale of assets such as property or stocks. The tax liability will depend on the time till which the individual has held the asset (after the date of its purchase). If there are co-owners, the gains from the property sale will be subject to tax based on the respective share of the co-ownership in the property.

When the property is held for an extended period, long-term capital gains tax (LTCG) will be applied. So, if a property was held for over two years, the LTCG Tax will be applicable. In the Union Budget 2024-25, the government reduced the rate of capital gains tax from 20% to 12.5%, with the removal of indexation benefit. After receiving feedback from the people, the government has provided two LTCG tax rate options for the taxpayer – one with 20% with indexation and another with 12.5% without indexation. The calculations will give varying results based on the option selected. If the property is held for less than two years before selling, it will be taxed under Short-term Capital Gains Tax. Understanding the tax implications is crucial for a property seller as it will impact their finances and prospects of future investments. 

Click to know the tax implications of 20% LTCG with indexation vs 12.5% without indexation

Plan to save on capital gains tax 

As a taxpayer, a property owner should plan to save on the capital gains tax that could otherwise significantly impact their pocket. To save on capital gains tax, the seller should consider re-investment. They can opt for investment in shares or mutual funds or bonds. Another best way to save on capital gains tax is to purchase a new residential property in India through the capital gains proceeds.

According to Income Tax laws, there are three primary long-term capital gains tax exemptions:

Section 54

According to Section 54, exemption from long-term capital gains on the sale of a residential property is allowed if the proceeds are reinvested in another residential property.

Section 54EC

According to Section 54EC, exemption from long-term capital gains on the sale of land or buildings is allowed if the proceeds are reinvested in designated bonds – we need to explain this point in greater detail – https://tax2win.in/guide/capital-gains-tax-on-sale-of-land

Where can one invest capital gains from the sale of land?

Under Section 54EC, taxpayers can invest the capital gains in designated bonds issued by institutions such as Rural Electrification Corporation Limited (REC), National Highways Authority of India (NHAI), Power Finance Corporation Limited (PFC) and Indian Railway Finance Corporation Limited (IRFC). These are alternative investment options available through which one can defer their tax liability on capital gains for a period of five years and save a significant amount in the long term. 

Here are some points taxpayers investing under Section 54EC should note:

• The investment in NHAI, REC, IRFC or PFC bonds must be made within six months of the sale (date of transfer) for full tax exemption.
• The total investment amount during the current and next financial years must not be less than Rs 50 lakh.

Click to read more about Section 54EC of Income Tax Act

Section 54F

This section pertains to the exemption from long-term capital gains on the sale of an asset other than a house (residential property) if the proceeds are reinvested in buying a residential property.

Capital Gains Account Scheme (CGAS)

If the property seller cannot invest their long-term capital gains before the due date of filing Income Tax Return (ITR) for the year, they can deposit the funds in the CAGS account. The funds should be utilised to construct or purchase another residential property within a particular time frame.

Points to remember when reinvesting in property

• The new residential property one is planning to buy or construct must be in India.
• The new residential property should be purchased one year before or within two years after the sale of the previous house. In the case of house construction, it must be completed within three years after the sale of the house.
• A lock-in period of up to three years from the date of purchase will be applicable on the newly purchased property. If it is sold, the acquisition cost of such property would be reduced by the amount of exempted gains.
• If the investment in the new property is not made before furnishing the tax returns, the person can still claim the tax exemption by depositing the amount of capital gains in the Capital Gains Account Scheme.
• The tax exemption value will be lower of the capital gains arising on the sale of the house or the investment in a new property.

Choose the right property

Firstly, one should understand that when planning to save on LTCG and reinvest in a property, the proceeds can be reinvested only in residential property and not commercial property. The available options for the investor are to either opt for a new residential property or for construction. 

Identify the right time to reinvest

There are some factors to be considered when deciding to find the right time to buy a property:

Market conditions, such as the demand and supply dynamics, availability of quality inventory, etc., are key considerations for making property purchase decisions. This is a key factor driving property purchase decisions. Lower interest rates tend to encourage property buying as it benefits home loan borrowers. Make sure to analyse the various factors before going ahead with the property purchase. 

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When planning to reinvest in a property, a seller should focus on saving on capital gains tax to maximise the benefits. Navigating the complexities of taxation can be confusing. Thus, one can seek professional help by consulting a financial advisor. Moreover, approaching real estate agents is also a wise idea if one is looking for assistance in terms of finding the right buyers and assessing the markets. 

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