Entered Contract to Sell Property and Realized Money Later? What is Date of Recognition of Sale?

Selling House Property? When is Date of Recognition of Sale for Tax Purposes

Buying or selling of property is not a single day’s job, it’s a huge step for both the parties and can take a while to put in effect and close in. The general paradigm observed is that the buyer and seller may spend weeks or months discussing the minute details of the transaction before signing a contract, and even post signing a contract, an executory period is allotted before the closing occurs. A contract is an agreement which is signed between the stakeholders of the transaction (usually the buyer and the seller), and acts as the first step of the purchase. The closing is the final step in the transaction, where all the settlement requirements have been complete between the buyer and the seller. A closing date is set before signing the contract, and should not be changed once the contract is signed. Sometime it happens that the contract is signed in one financial year that is before 31st March while the amount is received in next financial year and since no amount is received in earlier financial year, seller is unable to pay any capital gains tax in previous year. The question arises, what will be Date of Recognition of Sale for tax Purposes?

Reasonable and Agreed closing Date of Contract

Both the buyer and seller can mutually agree upon a reasonable closing date. This closing date should give the buyer ample of time to procure the monetary funds to process the transaction. The closing should be feasible for the seller to move out of the property, or in case of work-in-progress condos, give the seller enough time to complete the construction. The time period should also consider any property inspections, title report reviews, and other situations involving both the parties. If something notable comes up during the property inspection, whether minor or major repairs, these need to be settled between the buyer and the seller within the closing date. If such Date of closing is agreed in writing, the this is Date for Recognition of Sales

Delays in loan transactions can delay the Transfer of Property. What will be date of recognition of sales in such cases?

If the buyer is dependent on a loan, he needs to be prepared for delays in the loan transactions. The loan approval may take longer than expected, if certain requirements were not met, or some documents needed extra verification. To avoid these delays, the buyer may opt for ‘pre-qualified’ loans.

The loan approval and verification of property title, where required, plays a vital role in the closing of the property transaction as well. You can check with the escrow officer to understand how long it takes to issue the title reports and prepare the closing documents. It is beneficial if each party takes advice from their respective attorneys, and carefully goes through each provision mentioned in the contract.

There have been few cases of litigations on the subject where the property agreed to be sold had been agreed in one financial year but the amount exchanged in next financial year. The seller sought to seek the benefit of enhanced amount of the index for next year as well as the payment of capital gains tax liability was sought to be deferred to next year. However, in all such cases it had been held that the date of agreement of sale would be the date of recognition of sale as the defacto ownership of the asset is agreed to be transferred in name of buyer

Conclusion – So what is date of recognition of sale?

There is a lot that happens between the contract and the closing of a purchase, and the sale of the property begins with the contract and ends with the closing. So make sure you set a realistic closing date and take your time in reviewing the provisions of the contract to execute a healthy purchase. In the absence of it date of signing of the contract will be deemed as the date of sale agreement in terms of income tax act for payment of capital gains tax

Also Read- How to Save Capital Gains Tax on transfer of property