How should you structure simultaneous property transactions?
Posted by: Arti Bhargava on Oct 09, 2017, 03.04 PM IST
Kiran has inherited a property from his parents, but he is keen to sell it and buy a modern home in his city. He is finding it difficult to find a buyer for the old flat. He is also struggling to finance his new home. He is willing to put in some of his own money, over and above the proceeds from the sale of the inherited property to buy the new one. However, his concern is the co-ordination of the sale and the purchase and whether he will be able to carry out both transactions seamlessly. He is also unsure about the costs and taxes that may apply. How should he manage the process?
If Kiran has already identified the property he wants to buy, and has formally initiated the sale of his ancestral property, he should to approach lenders for the bridge finance. Getting the financial part of the transaction sorted should be his first priority. He should sequence the transaction based on how he would arrange the finances. If he is able to get a broker to help him with the sale, he will be able to speed up the process through their networks. If he uses self-financing to pay advances for the new property, and negotiate a loan from the bank, which will be pre-paid with the proceeds of sale, he may be able to get a good rate and loan amount. Prepayment on sale will also help him avoid distress selling.
In property related matters, it's crucial to ensure that the paperwork is in order. Kiran will have to register both the sale and the purchase legs of the transaction and pay the regulatory levies (registration fee and stamp duties). He will also have to pay taxes to the municipality as required. TDS applicability will have to be worked out if the proceeds cross the threshold of Rs 50 lakh. Capital gains tax will apply on the sale of the property, which will enjoy the benefits of indexation. Kiran should consider consulting an accountant to work out all the costs and taxes. With the help of his bank he should be able to mange both ends of the transaction, provided he does not end up having to pay or receive cash, as is notoriously the case with property dealings.
Content courtesy: Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta. This article appeared in Economic Times dated Oct 09, 2017, 03.04 PM IST