Tax Relief Strategy: Using Gains from Two Residential Units to Acquire One Property

Section 54 Exemption: Can You Combine Gains from Two Properties to Buy One House?

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Selling property in India often results in significant long-term capital gains (LTCG), making tax planning essential. A frequent question arises for property owners: Can the capital gains from selling two separate residential units be combined and reinvested into a single new home to claim the tax exemption under Section 54 of the Income Tax Act?

The Situation

Consider a taxpayer who builds a multi-storey building (e.g., stilt plus four floors) and later sells two of those floors to different buyers. The proceeds from both sales—the capital gains—are deposited into separate Capital Gains Accounts (CGAS). The core tax query is whether using the funds from both CGAS deposits to purchase a single new house will satisfy the conditions of Section 54.

The Answer: Yes, Consolidation is Allowed

The good news is yes, capital gains from the sale of two different residential units can be consolidated and invested into a single new residential house to claim the full Section 54 exemption.

Tax law experts confirm that Section 54 does not restrict an individual or HUF from combining capital gains from multiple sales of residential properties for reinvestment in one new house. As long as the initial assets sold were residential units, the taxpayer can pool the gains.

Since the gains from the two floors were correctly identified as LTCG from residential property and deposited into the Capital Gains Accounts, they qualify to be used together for the new purchase.

Key Requirements for Claiming the Exemption

To successfully claim the Section 54 benefit, the taxpayer must meet these critical criteria:

1. Original Asset: The property sold (the two floors) must have been classified as a residential house in the hands of the taxpayer.
2. New Investment: The gains must be reinvested to buy or construct a new residential house in India.
3. Timeline: The reinvestment must adhere to the mandatory time limits:
   • Purchase: Within one year before or two years after the date of sale.
   • Construction: Within three years after the date of sale.
4. CGAS Use: If the new property is not acquired before the tax filing deadline, the gains must be deposited into the Capital Gains Account Scheme (as was done in the scenario) and used within the prescribed timeline.

The Section 54 exemption provides significant tax relief, and this flexibility—allowing the pooling of gains from multiple sales—is a valuable tool for property owners.

Did you have any other specific aspect of Section 54 or capital gains tax you wanted to clarify?