Since your father has left behind a registered will and thereafter his children(you and your brother) had inherited it in the year 1990, this property is a self acquired property in your hands. (property acquired through will is a self acquired property).
Also subsequent to you entering in to joint development agreement, you have registered the floor allotted to you in the year 2013 in your name.
Answers to your Query:
Option 1: Executing a registered "WILL": You can execute a registered will at the nearest sub registrar office in presence of two reliable witnesses in favor of your sons/ whomsoever you wish to inherit the property after your time.
1.1 Your children can sell the property after inheriting the same from you (after your life time) in equal shares and repatriate the proceeds to USA.
1.2 There is no restriction whatsoever on US Citizens inheriting properties in India.
Taxation Impact in case of inheritance of properties through Registered Will:
1.3 There is no inheritance tax or any tax payable when the property transfers from you to your children through Will or other inheritance.
1.4 However capital gains will be applicable at the time of sale of property by your sons at the rates as applicable at the time of sale.
1.5 Currently the capital gains tax is 20% for properties held for more 3 years and capital gains tax is 30% if the properties are sold within 3 years from date of inheritance. Also in case of inheriting the property through Will, your children can compute their capital gains tax after claiming several benefits under income tax (i.e the market value of your property when registered in the year 2013 will be the cost of acquisition), benefits under Section 54 and pay a lower capital gains tax.
1.6 Also because of existence of Avoidance of double tax treaty between USA and India, if capital gains taxes are paid in india, No tax need to be paid in USA on the monies so received by your sons.
2.1 You can choose to sell the flat and then transfer the proceeds to them.
2.2 It will not be prudent now to sell the flat and become liable to pay capital gains tax again and that too at 30% tax slab as in all likelihood you might have paid capital gains at the time of Joint development agreement in the year 2010 or 2013.
2.3 Since you are planning to repatriate the entire money to your children now, in all probability you might not even want to explore the options available under Section 54 of Income Tax act and hence will be liable to pay 30% capital gains tax.
2.4 Once you repatriate the monies to your sons, the US Government will treat it as income or Gift and hence levy tax on the remittance. The reason is the monies so transferred by you is not Inheritance in any manner.
So in option 2 the disadvantages are
a) Capital tax liability of 30% at the time of sale.
b) Remittance made by you in favour of your children liable to tax in USA.
c) In addition to above tax outgo, you needing to lead a life outside of your own home.
It appears to me that you are a great human being who is willing to sacrifice comforts for the sake of your children and also that you intend to settle all of your assets in favour of your children ( succession planning) in your life time.
In our view, the First option is more advantageous than the Second option stated by you.
hope this helps.
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