Capital Gains question
Posted: Tue Apr 19, 2011 4:57 pm
Hello all:
I have a question related to existing practices of payments for the apartments in Hyderabad area and related capital gains computation.
I have booked an apartment. The apartment complex is currently under construction. The total cost of the apartment is approximately Rs 100 Lacs. Below is the existing practice followed by many builders and buyers in Hyderabad area.
They take approximately 40% (40 Lacs) of the payments as the cost of the apartment. The builder sales unfinished apartment to the buyer on paper. This 40% cost is same as the Govt rate in that area. The builder takes remaining money (60 Lacs) as a work-order cost to complete finishing work of the apartment. All payment is by check and 100% legal.
There is a cost advantage of doing this to the buyer. The buyer pays stamp duty, VAT, and service tax on 40Lacs. The buyer pays only VAT and service tax on work-order cost (60L). By doing this the buyer avoids paying stamp duty on work-order cost (60 Lacs).
I discussed this with a local Chartered Accountant. He told me that this is an established practice in this area and there is no legal risk for buyer in doing this. For Capital gains computation the total cost of acquisition (100 Lacs) will be considered as a cost basis.
Advantage of doing this is that the buyer saves approximately 4.5 Lacs in stamp duty.
Being an US citizen, I have to file US returns also. How will IRS view this? Will all of 100 Lacs be considered by IRS as a cost of acquisition, hence the cost basis?
Will appreciate feedback?
I have a question related to existing practices of payments for the apartments in Hyderabad area and related capital gains computation.
I have booked an apartment. The apartment complex is currently under construction. The total cost of the apartment is approximately Rs 100 Lacs. Below is the existing practice followed by many builders and buyers in Hyderabad area.
They take approximately 40% (40 Lacs) of the payments as the cost of the apartment. The builder sales unfinished apartment to the buyer on paper. This 40% cost is same as the Govt rate in that area. The builder takes remaining money (60 Lacs) as a work-order cost to complete finishing work of the apartment. All payment is by check and 100% legal.
There is a cost advantage of doing this to the buyer. The buyer pays stamp duty, VAT, and service tax on 40Lacs. The buyer pays only VAT and service tax on work-order cost (60L). By doing this the buyer avoids paying stamp duty on work-order cost (60 Lacs).
I discussed this with a local Chartered Accountant. He told me that this is an established practice in this area and there is no legal risk for buyer in doing this. For Capital gains computation the total cost of acquisition (100 Lacs) will be considered as a cost basis.
Advantage of doing this is that the buyer saves approximately 4.5 Lacs in stamp duty.
Being an US citizen, I have to file US returns also. How will IRS view this? Will all of 100 Lacs be considered by IRS as a cost of acquisition, hence the cost basis?
Will appreciate feedback?