Real estate is a great investment option and provides tax benefits as well – something that encourages people to invest in multiple homes. The easy availability of home loans and the option to rent out the second home all adds to the lure.
But transacting in real estate – whether you’re buying, selling, or letting out – has tax implications that you should consider before jumping in.
Take a look.
Taxation on sale of first property
If you are planning to sell your first property and then buy a second one, know that if your first property was bought through a home loan all your tax benefits except interest paid for the loan under Section 24B will not be applicable if you sell property within five years from the financial year you bought it in.
You can save taxes on any capital gains applicable from a property sale if you invest the money from the sale to buy a house within two years or construct your own house within three years of the sale.
The time period of one year before the actual sale of your property is also applicable to avail this tax relief.
Paying interest on second home loan
If you are living in a home for which you have taken a home loan, you are liable for tax deduction up to Rs. 150,000 for principal payments under section 80C of the Income Tax Act and a further deduction of up to Rs 200,000 under Section 24(B) for home loan interest repayments.
Now, if you choose to buy another property after taking a second home loan, you will not get any tax deductions for home loan principal amount repayment. You will, however, get tax deductions on the interest repayment for your second home loan without any limit.
So, if you pay an interest of Rs. 500,000 in the financial year, the whole amount would be eligible for tax deduction.
Also, if your second property is under construction, you get a deduction on 20% of the total interest to be paid during the pre-construction phase. This deduction is applicable for a period of five years.
Tax benefits for owning two properties
Here is a look at various taxation aspects and tax benefits in various scenarios when you own two properties.
1: One house is self-occupied and second one is rented out
When you own more than one property, you have a choice to treat one as a self-occupied property. The second is then deemed let out property, or DLOP. Now if you rent out your second property to earn rental income, the rental income you earn is fully taxable as per the IT Act.
On a positive note, you are allowed a standard deduction of 30% on the rental earnings towards maintenance. Also, if you have taken a home loan for your second property, the interest payment made for the loan is also tax-exempt.
For example, assume you earn an annual rent of Rs. 200,000 from your second property. Also, assuming you have paid Rs. 150,000 towards home loan interest repayment, here is how you will be taxed.
Rental income earned after deducting municipal dues = Rs. 200,000.
· Standard deduction @ 30% = Rs. 60,000
· Total income earned from rent = Rs. 200,000 – Rs. 60,000 = Rs. 140,000
· Money paid for home loan interest repayment = Rs. 150,000
· Overall tax liability/benefit= Rs. 150,000 – Rs. 140,000 = Rs. 10,000.
So, effectively, for renting out your second property, you can claim a tax benefit of Rs. 10,000 when filing your income tax return.
2: Both properties are rented out
If you decide to rent out both your properties, then the rental income you earn from both will be liable for income tax. The overall tax liability would be calculated after deducting municipal dues, 30% for maintenance, and a full deduction of interest paid on both the corresponding home loans without any upper limit.
3: No property is rented out
If you do not rent any of your properties, you will be liable to keep only one as self-occupied. The second property will automatically be considered rented, and any rentals earned will be part of your taxable income barring deductions. You can however choose which property be made self-occupied and which deemed let out.
Buying a second home can work to your advantage as an asset provided you do your tax liability calculations before making the purchase.
The author is the CEO of BankBazaar.com