A property sale may not always generate profits, particularly in cases involving market corrections, distress sales, or properties held in areas witnessing weak price growth. If a house, plot, or commercial property is sold for a lower value than its indexed purchase cost and associated transfer expenses, the transaction will be classified as a capital loss under income tax rules.
The Income Tax Act classifies such losses under short-term or long-term capital losses depending on the holding period of the property. Taxpayers are required to furnish the complete transaction details while filing their (ITR), including the purchase and sale dates, acquisition cost, sale consideration, stamp duty valuation, brokerage/transfer costs, and improvement expenses wherever applicable.
In certain high-value transactions, you also need to furnish the Permanent Account Number (PAN) of the buying party, according to Siddharth Maurya, Founder & Managing Director of Vibhavangal Anukulakara Private Limited.
He further recommended that taxpayers should save sale deeds and purchase agreements, capital gains calculations, and any improvement bills, as these may be required in the future. “Providing detailed transaction information will prevent the issuance of tax notices and allow for the full claim of loss set-offs and carry-forwards.”
Can property-related losses be set off against other capital gains?
Yes, capital losses from property transactions can be set off against other, although the tax treatment will largely depend on whether the losses are classified as short-term or long-term.
As per the income tax rules, a short-term property capital loss is set off against all capital gains, whether short or long, from equity, mutual funds, gold, or another property, according to Maurya.
In contrast, long-term capital losses can be set off only against long-term capital gains. For instance, if a taxpayer sustains a long-term loss from the sale of a property, then this loss can be set off against long-term gains from the sale of gold, long-term debt mutual funds, or a sale of another property.
“This long-term loss can also be set off against long-term gains from the sale of listed shares and long-term , which are subject to tax under Section 112A,” Maurya explained.
He added that taxpayers also need to know that capital losses cannot be set off against income from salary, business or interest.
Can you carry forward these losses?
Yes, if a taxpayer is unable to set off capital losses in the same financial year because there are not sufficient capital gains, then the loss remains unadjusted and will be carried forward.
“Both short-term and long-term capital losses can be carried forward for a maximum of eight assessment years i.e., for eight years succeeding the assessment year in which the loss has occurred,” Maurya said.
However, in order to claim this benefit, the taxpayer must file their ITR within the the prescribed due date under Section 139(1) of the Income Tax Act. If the return is filed late, the person will lose the benefit entirely.
“This provision is especially favorable to investors and property owners in case real estate cycles shift, since gains aren’t always in the same year as losses. This is where proper reporting comes in, as the benefit can be planned for and utilized in future years,” Maurya noted.
Which form to use for reporting property sale losses?
Taxpayers reporting property sale capital gains and losses have to file either ITR-2 or ITR-3 based on their income. ITR-2 is usually used by salaried individuals, pensioners, and individuals without business income.
Meanwhile, business income earners or professionals having property sale income and loss typically file ITR-3.
In the ITR, the capital gains or losses are to be reported in the ‘Schedule CG’ section. Taxpayers are supposed to report the entire transaction in detail, as incorrect reporting or mismatch with AIS/TIS may lead to an Income Tax Department notice, the tax expert said.
Tax treatment of residential vs commercial property sale
From a capital gain tax law standpoint, income from the sale of a residential property and income from the sale of a commercial property are more or less the same in the Income Tax Act.
Whether a capital loss is short term or long term depends on the holding period of the asset, and not on whether the property was residential or commercial. As for losses, the same rules apply to set-off and carry-forward provisions, he said. “There are, however, differences in practice with respect to the loss. For example, if the commercial property was used for business and depreciation,” Maurya said.