Capital Gains Tax On The Sale Of House - How Much Do You Have To Pay?

November 26, 2004
By Srinidhi Goenka

The capital gains tax for the sale of house is rather complicated. A lot of factors need to be considered when you calculate the capital gains tax on your house.

To start with, there are certain conditions under which there is no capital gain tax on your house, provided all these conditions are met. Firstly, you should have purchased a house with the aim of using it as your residence rather than to make a profit. Secondly, throughout the period of ownership, the house was utilized by you only for your residence. Thirdly, this house was your only home. Fourthly, the area covered by the house and garden is not more than half a hectare.

Even if you do not meet all the above conditions, you can still get relief if you meet most of the above stated terms. For example, if you were using a portion of your house for residential purposes and a portion of it was let-out, then you can get partial relief. Rules also differ in case of married couples and those who are divorced or separated.

Thus, if you are smart and you know the rules properly, it is possible for you to get some deductions in the tax under most circumstances.

Situations Which Can Create Confusion
But there are certain questions which can create confusion such as what if you have gifted your house to a relative. As per law, except for a gift to your spouse, all other gifts are considered to be disposals. For example, even if you have purchased a house and given it to your children, then it is considered to be a disposal and it might be likely that you will have to pay gains tax on it.

Another question which arises is that whether your house qualifies as a business asset or not if you have let it out. In most cases, it does not. Two examples are illustrated below :

· You are the owner of a few apartments in New York. You have given these out on rent for student accommodation. Also, you pay income tax on this property. As per law, these are not business assets.

This is because residential property which is rented for residential purposes only, is not a business asset. But if the same was given to further a business, then it would be a business asset.

· A farmer owns a cottage. He has let it out to a worker on his farm as a tied cottage. As per law, this is a business asset.