How To Sell Property With Running Loan

Housing finance makes it possible for many of us to afford property early in life. However, there are several ways in which this facility restricts you, too. Selling a property, for instance, against which you are still paying a home loan might not be as simple as selling a house against which there is no home loan. Since there is a third party i.e. financial institution involved in the process, there is an altogether different approach that has to be adopted by sellers of such properties.

Now, let us look at how you could go about it in different scenarios. But, before that, let us understand the tax implication on the sale.

*If the property is being sold within two years of purchase, the profit made on the sale would be taxed as short-term capital gains (STCG). Supposing you are in the highest tax bracket, 30.9 per cent of your income would be deducted as STCG. Also note here that even if you plan to use the sale proceeds to buy another property, no deductions are available for you.

* If the property is being sold after two years of purchase, the profit made on the sale would be taxed as long-term capital gains (LTCG). This income is taxable at 20 per cent. However, if the proceeds are invested in buying another house property, deductions are available under Section 54 of the Income Tax Act.  Note here that the exemption is limited to capital gain on sale, and not on the entire amount you pay to acquire the new property. This new property could be bought one year before the sale of the property or two years after the sale.

Considering you will have to pay a higher amount on tax if you sell the property in the short term, avoid selling it within two years of its purchase, keeping in mind the taxing implications.

Before you get talking to prospective buyers

Since you have taken a home loan to make your purchase, all your documents are lying with the lender. However, you certainly have in your possession the photocopies of all the copies submitted with the bank. Make sure you have enough papers in your possession — copy of the sale deed, loan-related documents, electricity bills, property tax receipts, et cetera— to prove your ownership over the property. That is the first thing a buyer would want to check after they select your property.

In the meantime, inform your bank you are going to initiate the process of property sale. At this stage, the bank could issue you a letter, stating your outstanding liabilities. This would work as another key proof of your ownership of the property.  

It is quite important that you inform the buyer about your loan liability at the very outset of the negotiation.

After you find a buyer

Now, let us assume you have found a buyer. There could be three scenarios as far your home loan outstanding liability is concerned.

If the buyer is not taking a home loan:  This could possibly be the best scenario from a seller’s point of view. You could ask the buyer to transfer an amount that would be enough to pre-pay your loan in your loan account. Within 10 days of this, your bank will release all the original property-related documents which could subsequently be transferred to the new buyer. The buyer can pay you the remaining amount in a different account.

If the buyer is taking a loan: If the buyer, too, is taking a home loan, there could be two different scenarios.

*In case they are taking the loan from the same bank as the seller, it could be convenient for both parties since the bank already “knows” everything about the property; it only has to assess the new buyer’s financial standing. Banks as a standard practice assess and evaluate a property before they grant a loan against it. This valuation process is time-taking. They also make sure if the borrowers would be able to repay the loan. These are the two key criterions for granting loans. In this scenario, it only has to run a check on the new borrower, and not the property. Now, the three parties enter into a tri-partite agreement. Part of the loan issued to the new buyer will be used to settle the previous loan while the remaining amount would be transferred in the seller account. Do note here that the bank would treat the buyer as a new borrower and follow the same process it did when sanctioning the previous loan. This means the new borrower will have to pay all the additional costs that are involved in taking a home loan. However, on its discretion, the bank might offer you some waiver since you are its old customer.  

 *In case the buyer goes to a different bank to take a loan, they would have to present to the bank copies of all the required documents along with that letter from the seller’s bank, stating his outstanding liability. After following the standard procedure, the bank would issue a cheque in favour of the seller’s bank paying off all the dues. After the seller’s bank releases the property papers and the buyer submits them with his bank, the latter would release the remaining amount to the seller.