Bought co-owner’s 50% share in a property? How capital gains tax applies when selling whole asset

Suppose you have jointly owned residential property with your sibling or with someone else, with each of you holding a 50% share. Later, you buy the co-owner’s 50% share and become the sole owner of the property. After that, you sell the entire 100% of the property.

In such a case, calculating capital gains tax is not as simple as it may seem. This is because the two 50% shares were acquired on different dates and at different prices.

Here’s what experts have to say about the tax treatment in such a scenario.

How is capital gains tax calculated?

Says Vijay Raundal, Director, Teerth Realties, “Owning 50% initially and subsequently purchasing the remaining 50% does not mean the property should be treated as one single capital gain. Since the two interests were acquired at different times and at different costs, the gains are likely to be computed separately.”

For immovable property, Raundal noted that the holding period of 24 months determines whether the gain is long-term (LTCG) or short-term (STCG).

• If the first 50% share was held for more than 24 months, the gain on that portion can be LTCG.
• If the remaining 50% was purchased only one year before the final sale, the gain on that portion can be STCG.

Suppose the first 50% was purchased on 1 August 2022, the remaining 50% on 1 August 2025, and the entire property was sold on 1 August 2026. The first 50% has been held for four years and will qualify as LTCG, while the second 50% will be considered as STCG.

“LTCG on sales after 23 July 2024 is taxed at 12.5% without indexation. Therefore, for each share, the acquisition cost, holding period and purchase consideration will determine the tax treatment,” he added.

What if the property was owned 100% from the beginning?

Keshav Mangla, GM-Business Development, Forteasia Realty, noted, “The calculation would be simpler if the taxpayer had owned the entire property from the date of acquisition.”

The capital gain will be the sale price minus the original acquisition cost and eligible expenses. If the property was held for more than 24 months, the gain would be LTCG.

Mangla gave an example where a property was originally bought for ₹60 lakh, with the taxpayer and sibling each owning 50%. The taxpayer later bought the sibling’s 50% share for ₹50 lakh and eventually sold the entire property for ₹1.5 crore.

• If the taxpayer bought the other 50% later: The original 50% would have a ₹45 lakh gain ( ₹75 lakh − ₹30 lakh), while the later-bought 50% would have a ₹25 lakh gain ( ₹75 lakh − ₹50 lakh). In this case, the total capital gain will be ₹70 lakh.
• If the taxpayer had owned 100% from the start: The total capital gain would be ₹90 lakh ( ₹1.5 crore − ₹60 lakh).

How Section 54 exemption can be claimed?

Hardik Shah, Director, Shyam Group Dholera SIR, explained that “Section 54 can provide relief when an individual sells a residential house and reinvests in another residential house in India. However, the exemption applies to eligible LTCG, not to STCG arising from the recently purchased 50% share.”

The new residential house must be:

• Purchased within one year before or two years after the sale, or
• Constructed within three years after the sale

“The exemption is restricted to the amount of eligible capital gain or the amount used for making the investment, whichever is less,” he noted.

He also added that the new house must be held for at least three years; selling it before that can lead to the Section 54 tax benefit being withdrawn.

Disclaimer: This is meant for informational purposes only. Please consult a qualified tax expert before making any financial decisions.