How to use house sale proceeds to buy two flats and pass them to your children tax-free

Selling property to buy two flats

• Section 54 exempts LTCG if adjoining flats form one residential unit.
• You can buy flats jointly with children if you invest the required amount
• Inherited property passes tax-free to children if bequeathed in your will

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Can I use the sale proceeds of a house held over 24 months to buy two adjoining flats—one with my son and one with my daughter—without tax, and if not, how can I structure them to pass to my children tax-free?

For availing tax benefits under Section 54 of the Income Tax Act, you are required to invest only the long-term capital gains on the sale of the existing house property and not the sale consideration. Thus, the extent of money which you need to invest will be lower than what you are anticipating now.

To claim this exemption in respect of long-term capital gains (LTCG) from the sale of a residential house, the investment has to be made in one house property only. However, as per decisions of various Income Tax Tribunals, if more than one flats are used as a single residential unit, like an adjoining flat in the same building, the benefit can be claimed under Section 54 even if investment is made in more than one flat.

You can purchase the new property in the joint names of yourself and your son or daughter, provided the required investment is made by you. Your son or daughter can be made a joint owner in the agreement even if they do not invest any money in the property. To ensure that the property passes on smoothly to your son and daughter after your death, please bequeath the house property being bought to your son and daughter. Your son or daughter will not have to pay any tax on the property inherited from you.

Section 54 also grants a once-in-a-lifetime opportunity to claim exemption by investing long-term capital gains arising from the sale of one residential house in two residential houses, provided the long-term capital gains do not exceed two crore rupees.

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