Buying a second home for investment? Now consider these tax implications

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Published: May 26, 2017 10:20:16 AM

Under the earlier tax regime, taxpayers were allowed to offset any amount of loss on a rented property. However, no longer now.

Buying a second home for investment purposes no longer remains as lucrative as it was before.

If you are planning to buy another home for investment, then think again. For, buying a second home for investment purposes no longer remains as lucrative as it was before.

Under the earlier tax regime, taxpayers were allowed to offset any amount of loss (on account of interest on housing loan) on a rented property against other heads of income. The restriction of Rs 2 lakh was applicable only in case of a self-occupied property. However, no longer now. The Budget 2017 extended this restriction to ‘rented’ and ‘deemed-to-be-rented’ homes as well.

“The Budget 2017 has limited the amount of set-off of ‘loss from house property’ to a maximum of Rs 2 lakh per annum. This means that taxpayers will now be able to set off maximum Rs 2 lakh against their other income, although the unadjusted loss from the house property can be carried forward for 8 assessment years to be set off only against income from house property,” says Chetan Chandak, Head of Tax research, H&R Block India.

This move is aimed at bringing parity between the tax benefit allowed on ‘self-occupied’ property with that which is ‘rented or deemed rented’ in terms of the loss on house property. This can be a big loss for those taxpayers who bought or were planning to buy 2nd high-value house property so that they can offset the big loss on account of housing loan interest paid for the 2nd property, against their other taxable income (salary or other sources). However, now they will be able to claim a loss adjustment of Rs 2-lakh only in any single year.

“Though taxpayers can carry forward and adjust the remaining loss in succeeding 8 years, but in case of a high-value property, it will take a substantially long time to bring down the annual interest/loss lower than Rs 2 lakh to be able to adjust the carried forward losses. So ultimately this excess (above Rs 2 lakh) loss may not result into any future tax benefit for the taxpayer as it will expire after 8 years,” says Chandak.

On the other hand, if some has only one house which is fetching high rental, then he can still buy another piece of property with loan and offset the interest up to 70% of the rental income from the first property. Though this can reduce his tax liability significantly, but to optimize the benefit, he should exercise some basic due diligence before actually buying property. Like, whether he will continue to rent the property for a longer duration? Whether the rate of appreciation in the new property price will be more than the net of tax cost of borrowing the funds, etc.

At the surface this seems to be a very strange move when one looks at various incentives provided to the affordable housing sector and the various other benefits on the capital asset transactions, viz. reduction in the holding period of long-term immovable property from the existing 3 years to 2 years and changing the base year from 1980-81 to 2000-01 for cost inflation index (used for capital gain calculations).

“A deep insight into this surprise move can reveal the government’s intention to bring down property prices. All these amendments aim at taking out investors (who invest in property only to earn good profits) from the property market and bringing down the property prices so that they are within the reach of the normal taxpayer who wishes to buy property for his own residence. However, this can be seen as a double-edged sword. On the one hand, it can help in bringing down the property prices significantly and making it affordable to the common man, while on the other hand, it can demotivate those investors who can invest in a piece of property and rent it to the ones who are not so privileged,” informs Chandak.

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