Avoid buying a house in wife's, children's name to save capital gains

The taxpayer may not get the tax benefit if he is not the title holder in the new property

Recently, the Income-Tax Appellate Tribunal’s (ITAT) Mumbai bench denied a taxpayer the benefit of long-term capital gains (LTCG) tax, which allows an individual to save tax on the gains he makes after selling a house. He can do so by investing the proceeds in a new residential property. The reason for denial: The taxpayer didn’t buy the new property in his name - instead he purchased it in the name of his wife and daughter.

The order is contrary to the view that some other ITATs and high courts have taken in the past. Delhi High Court, for example, allowed a taxpayer to take the benefit of the provision in a similar case. “The Income-Tax (I-T) Act does not specify that the taxpayer has to invest in the new house in his name mandatorily. It is, therefore, at the discretion of the authorities to interpret it. Some judicial authorities have allowed the taxpayer to take the benefit as the law pertains to a beneficial provision, and therefore, they construed it liberally,” says Naveen Wadhwa, a chartered accountant with Taxmann.com.

According to Section 54 of the I-T Act, on selling a house, an individual can save capital gains tax if he uses the proceeds to buy a new one within two years from the date of sale or one year before selling the house. Many businesspersons like to keep the assets in the name of the close family members like wife or children because authorities cannot attach assets of close relatives in case of default by an individual. But there are other reasons too. Some may want to buy a new house in the name of relative to bequeath assets or to provide financial security. Based on conflicting orders, it can get be confusing for the taxpayers on the way forward.

Tax experts say that the stand that an individual can take depends on the orders passed by the high court and ITATs in the taxpayer’s city or state. If a high court has taken a specific view, the ITAT is bound to go with the court’s interpretation. In the above-mentioned case, the judicial member who passed the order cited that in a similar case the Bombay High Court had ruled that for “claiming deduction under the aforesaid provisions the new house property must be owned by the assessee and/or having legal title over the same”. He also mentioned that though there is judicial precedence where Delhi High Court had taken a contrary view, he is bound by the Bombay High Court’s decision and denied the claim.

If you are in Maharashtra, there are chances that you would be denied the claim in a similar case. But if you are in Delhi, you would get the benefit. For taxpayers, it’s not always possible to know the judicial stand on such subjects. “To save the LTCG, it’s always better that the owner of the property that was sold also becomes the title holder in the new one. If husband and wife had an equal ownership of the old house, they should also have an equal ownership in the new house to avoid tax-related hassles,” says Arvind Rao, founder of Arvind Rao & Associates.

Tax experts also point out that in case of joint ownership, it is also important that there’s documentary evidence to show who paid the money and in what proportion. In cases where a house is jointly owned in equal proportion but the husband has paid the entire money, only the husband can take the benefit of LTCG on selling the old house and using the funds to buy a new one.

Many times, a husband and wife make an arrangement where one pays for the house, and the salary of the other is used for household and other expenses. For the couple, it's a joint effort in monetary terms, but if there are no documents to show that the wife has also contributed, she may not be considered as an owner for tax purpose.

Get the capital gains tax benefit

- The title holders in the old property should also be the owners of the new one

- Keep the proportion of ownership same as it was in the earlier house

- Keep proof of each owner's contribution

- To bequeath the asset, you do it through a gift deed