Fractional ownership of commercial property is emerging as a new means to wealth generation. However, anything that allows you to accumulate wealth comes with certain tax implications.
The tax rules for fractional ownership of commercial property are different from those that apply to other residential properties.
One of the biggest concern that property owners face is heavy tax log post selling of their property. To avoid the same, most of the sellers invest in an alternative property of same or higher value which would completely eliminate the tax liability and can avail benefits from either u/s 54 or 54F of Income Tax Act, 1961.
However, fractional ownership of property is not treated as other properties for tax purpose.
“When it comes to fractional ownership, this nature of investment only transfers a part/share of the entire property and the physical transfer in whole as such does not happen. So, the seller might have to pay the due taxes,” Sudarshan Lodha, CEO and Cofounder, Strata Property Management, told FE Online.
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Lodha further said that if one sells their fractional ownership share they will be in turn transferring the shares of the holding company (SPV) and can claim benefits u/s 54F by investing the entire sale consideration in residential property. However, this also has certain conditions which could be understood before making the transaction.
In the fractional ownership model, investors receive equity shareholding and securities of an investment vehicle (SPV) that owns and operates the underlying property.
“When you are the sole buyer of the property, you will get ownership of the property in lieu of the capital investment made by you. In this transaction, you get the complete ownership of the property and your name would be mentioned on the property papers. However, when you invest through fractional ownership, you get a shared ownership in the property and the transaction would happen under the name of a third party involved. This party is called SPV (special purpose vehicle),” said Lodha.
SPV is is a subsidiary created by a parent company to isolate financial risk. In short, owning a property through fractional ownership would make you a shareholder and not an absolute owner of that property.
No tax write-off
According to Varun Mohan, CEO, Definite, the benefit of tax “writing off” cannot be transferred to the fractional ownership asset class.
“Fractional ownership cannot be treated same as other properties. Even in the case where you have sold your commercial property you are only restricted to buy either residential property or capital gains bond of specified institutions and claim exemption under section 54, 54F, 54EC,” said Mohan.
“It is only possible if you buy a residential property from the proceeds of sale. If you buy one commercial property from the proceeds of sale of another commercial property you cannot write off gains. Financial effect is same whether you buy fractional ownership or another commercial property,” he added.
Aryaman Vir, founder and CEO, MYRE Capital, said that re-investment of capital gains is only viable in residential real estate and is not applicable to commercial real estate.
“There are no ‘tax write-offs’ available in CRE,” he added.
