Selling two homes? New tax ruling says you can still save on capital gains

A recent ITAT ruling offers tax relief for those selling two homes and reinvesting in one, easing capital gain worries, especially for joint owners and middle-class families

A recent ruling by the Income Tax Appellate Tribunal (ITAT), Mumbai, has clarified that taxpayers selling two different residential properties can still claim long-term capital gains (LTCG) exemption under Section 54 of the Income Tax Act, if the sale proceeds are reinvested in a single residential property, provided all other conditions are met.

 

Experts say this interpretation could ease tax pressures for middle-class families and joint property owners navigating complex real estate transactions.

 

‘Judgment based on liberal interpretation’ 

“This judgement is based on a liberal interpretation of Section 54, thereby emphasising that denial of exemption merely on literal interpretation or pure technical grounds is not the intent of law,” said Riaz Thingna, partner, Grant Thornton Bharat. He added that the ITAT allowed the exemption even though two houses—owned separately by a husband and wife—were sold and proceeds were jointly reinvested in one new home.  Calculate Income Tax: Income Tax Calculator Tool

 

The ruling sets a precedent that as long as each co-owner claims LTCG exemption only on their respective share and avoids double benefit, the exemption under Section 54 cannot be denied.

 

Multiple sales, one house still valid

 

According to Dipesh Jain, partner, Economic Laws Practice, “There is no restriction under Section 54 if long-term capital gains from multiple house properties are invested in one residential property, as long as the conditions of the section are fulfilled.”

 

He further clarified that although Section 54 limits the investment to only one (or in some cases, two) residential houses, it does not restrict gains arising from the sale of multiple properties.

 

More flexibility, but risks remain 

While both experts agree that the ruling brings flexibility, they caution that risks at the initial assessment stage still exist.

 

“The decision offers greater clarity, but taxpayers must be cautious. If multiple properties are sold by the same person and the total gain is reinvested into a single house, exemption may be denied,” warned Thingna, citing the specific wording of the law that refers to “a residential house”.

 

Jain noted that litigation risks cannot be ruled out at the assessing officer level, even though higher appellate forums may offer relief.

 

Precautions for claiming exemption

 

Taxpayers planning to use this benefit should take the following precautions suggested by both of the experts: 

 

·  Maintain clear documentation proving ownership and transaction details.

 

·  Ensure compliance with all conditions of Section 54, especially investment limits.

 

·  Avoid double claiming of exemption in case of joint ownership.

 

·  Keep judicial precedents handy to support claims if challenged by tax authorities.

 

“The taxpayer must show that joint owners are not taking double benefit and have claimed exemption only on their respective share,” emphasised Thingna.

 

The ITAT’s interpretation aligns with the intent of Section 54 to promote reinvestment in housing, but taxpayers must tread carefully and consult professionals to ensure compliance and avoid potential disputes.