A simple mistake could cost you big when selling mutual funds and buying a new house. For investors trying to use long-term capital gains (LTCG) to fund a home purchase, the order of operations is everything.
Thank you for reading this post, don't forget to subscribe!Let’s look at Rajiv, an IT consultant in Bengaluru, who planned to redeem an equity mutual fund and use the profits to buy a new home. He was hoping to avoid LTCG tax under Section 54F of the Income Tax Act. The catch? He already owned two houses—one he lived in and a second rental property.
He assumed that since he was using the money to buy a new house, he would qualify for the tax exemption. But a quick chat with his tax advisor revealed a critical error in his plan.
The Costly Mistake
Section 54F states that to qualify for the tax exemption, you cannot own more than one residential house on the date you sell your original capital asset (in this case, the mutual fund). Had Rajiv sold his mutual fund first, his ownership of two houses would have disqualified him, costing him a significant amount in taxes.
The Legal Fix
Rajiv’s advisor suggested a simple but brilliant change in strategy: change the sequence of events.
- Sell the House First: Rajiv sold his second house. Now, on paper, he owned only one residential property.
- Redeem the Mutual Fund: With only one house to his name, he redeemed his mutual fund. He now legally qualified for the Section 54F exemption.
- Buy the New House: He used the combined proceeds from selling his second house and his mutual fund to purchase the new property.
By following this sequence, Rajiv got a double tax benefit. He not only saved on taxes from his mutual fund gains under Section 54F, but he also qualified for a tax exemption under Section 54 for the gains from selling his second house.
The lesson here is simple: sequence matters. Timing your transactions can be the key to legally maximizing your tax savings and gaining a significant financial advantage.
