Gains & Losses from Sale of Long-term Business Property

An asset is something of value that your business owns, like buildings, machinery, equipment, and vehicles. When you sell a capital asset (used for investment or to make a profit), you can sell it at a gain or loss. The difference between the original cost (called the basis) and the sales price is either a capital gain or a capital loss.

For example, if you own business equipment, you may add to the basis by upgrading the equipment or reduce the basis by taking certain deductions and by depreciation. The cost at purchase plus the changes create an adjusted basis at the time you sell the equipment. The difference in this adjusted basis and the sales price is either a capital gain or a capital loss.

Capital gains tax is a tax charged on all capital gains. These gains are taxed differently, depending on how long they are held. If you own the asset for more than a year before you sell it, your capital gain is long-term. If you hold it one year or less, the gain is short-term.

To calculate your capital gains tax rate for your tax return, you must separate short-term and long-term capital gains on all the assets you sold during the year to get a net short-term and net long-term capital gain (or loss).

The net long-term capital gain is taxed is usually no higher than 15% for most taxpayers, but there are some exceptions.

A net short-term capital gain is usually taxed as ordinary income, based on your tax rate.

At the time of Sale of any Real Estate Property, Tax is liable to be paid on the Gains earned on the sale of the Real Estate Property. Such Gains could either be Short Term Capital Gains or Long Term Capital Gains. The basis of such Classification in the Income Tax Return has been given below:

• Short Term Capital Gain (STCG): If the Real Estate Property is held for less than 24 Months.
• Long Term Capital Gain (LTCG): If the Real Estate Property is held for more than 24 Months (Reduced from 36 to 24 Months from FY 2017-18 onwards).

Full Value of Consideration

Full Value of Consideration means what the transferor receives or is entitled to receive as consideration for the Sale of Property /Asset. This Value may be in cash or in kind i.e. in exchange for an Asset.

In case of exchange of an asset, the full value for the computation of Capital Gains shall be the Fair Market Value of the Property (Asset) granted in exchange. Fair Market Value in relation to Capital Gains means the price which the Property (Asset) would normally fetch if sold in the open market on the Relevant Date.

In case, the full value of consideration is received in installments in different years, the entire value of consideration shall be the Market Value of the Property/Asset granted in exchange.

Expenses on Transfer

Expenses on Transfer include any expenditure incurred, whether directly or indirectly, for the purpose of transfer like Advertisement Expense, Brokerage Expense, Stamp Duty, Registration Fees, and Legal Expenses etc. However, any expense which has been claimed as a deduction under any other provision of the Income Tax Act cannot be claimed as a deduction under this Clause.

Cost of Acquisition

Cost of Acquisition is the price which the assessee has paid, or the amount which the assessee has incurred, for acquiring the Property /Asset. The Expenses incurred at the time of completing the title are a part of the cost of acquisition.

In cases where the Capital Asset became the property of the assessee in any of the manners mentioned below, the cost of acquisition shall be deemed to be the cost for which the previous owner of the property acquired it:

• On the Distribution of Assets/ Total Partition of HUF.
• Under a Gift or Will.
• By Succession, Inheritance or Devolution.
• On Distribution of Assets on Liquidation of a Company.

Capital gains on depreciable asset

Under Section 50 of Income Tax Act, if you have sold a capital asset forming part of a block of assets, including building and machinery, on which the depreciation has been allowed under the law, the income arising from the sale is treated as short-term capital gain.

The reader must note here that as land is not a depreciable asset and so, cannot form part of a block of assets in absence of rate of depreciation. Hence, the provisions of Section 50 cannot be invoked, in case of sale of land. If land is held for a period of more than 24 months, the gains earned through the transactions is taxed as long­term capital gains.

Computation of profit or loss from sale of business property in an asset block

Unlike regular accounting where the depreciation is calculated with reference to the cost or written down value of each asset, the depreciation for a particular block of assets is computed in an aggregate manner. If there are more than one assets in one particular block of assets, the depreciation is calculated on the value arrived at after adding the cost of acquisition for the assets purchased during the year and falling under the same block of assets, to the written down value of the block at the beginning of the year and by reducing the sale price of one or more assets sold during the year.