How Do People Buy Real Estate While Saving Taxes?

Don’t you wonder why the rich are getting richer and the middle class segment is still in the vicious circle of saving and minimal spending? The secret lies in saving taxes!

How?

See, if your total gross income is over Rs.3 lakh, then you are supposed to file income tax. Unlike the rich, the working class people go through the tax burden that acts as a hindrance for making optimum savings and investments.

Here, the tax-savings strategies come into play that not only help you to make wise investments but aids in saving taxes.

One of the most efficient tax saving strategies is investing in real estate properties.

Want a detailed breakdown of it? Stick to our write-up to know detailed info on the same!

(A) How does investing in Real Estate Properties help in saving taxes?

Let me give you a glimpse of this whole context- if you refer to the tax exemptions in section 54 and Section 54F of the Indian Income Tax Act, then you can truly save a sizable portion of the profits.

You can easily claim tax deductions through it.

The following points describe how real estate investments play a key role in saving taxes-

(A.1) Depreciation for Tax Savings

Most assets gradually lose value over time, a phenomenon known as depreciation. For real-estate investors, this presents a unique opportunity to save on taxes. By accurately accounting for the depreciating value in financial statements, investors can deduct this amount, thereby reducing their taxable income and ultimately lowering the amount of tax payable each year. 

This seemingly small initiative can translate into significant savings, allowing investors to retain a substantial portion of their earnings.

(A.1.1) The Power of Depreciation in Real Estate

Depreciation emerges as one of the most advantageous tax strategies for real estate investors. The concept revolves around assets, including properties, losing value over time. Investors can strategically deduct a portion of this value loss as an expenditure on their tax returns, resulting in a tangible reduction in their overall tax liability. 

Gunjan Goel, director of Goel Ganga Developments, emphasizes the transformative impact: “Real estate investors may dramatically reduce their tax obligation by correctly using depreciation deductions, enabling them to continue to keep more of their earnings.”

(A.2) Absence of tax on the  sale of agricultural land

India’s long standing support for agricultural activities makes investing in agricultural land a strategic choice for real-estate investors. One key advantage lies in the absence of tax on the sale of agricultural land, a significant and appealing tax exemption. 

The tax-saving journey becomes smoother as no capital gain tax is imposed on such sales, thanks to agricultural land not being classified as a capital asset under Section 54 of the Income Tax Act.

(A.2.1) Diverse Income Avenues with Agricultural Land

Investing in agricultural land not only provides tax benefits but also opens doors to attractive returns. The land can be utilized for organic farming or leased out to farmers, offering potential income streams. 

Vijay Chaudhary, Chairman of Ram Rattan Group, affirms this preference: “Investment in Raw/Agriculture Land is always a first choice for investors as there is No Tax for the sale of Agricultural Land. Capital Gain Tax, as per the Indian Income Tax Act, would not attract Agricultural Land as it does not fall under the definition of Capital Assets.”

(A.2.2) Strategic Period for Real Estate Investments

Experts have shared valuable insights, highlighting the defined period for investment in real estate properties to save or gain exemption from capital gain taxes under Section 54 or 54F of the Income Tax Act 1961. Agricultural land emerges as a sweetener for investors seeking passive income, with options like organic farming, fractional holdings, and assured rental from community farming.

(A.3) Tax Exemption on House Property

While the sale of house property typically attracts capital gain tax, savvy investors can explore exemptions outlined in Section 54F of the IT Act. Reinvesting the proceeds from the sale of residential property into another house property within three years or investing in a residential property one year prior to selling a capital asset can lead to a complete waiver of capital gain tax. These strategic approaches provide investors with opportunities to optimize tax outcomes while navigating the real estate landscape.

Note: When it comes to real estate, smart ownership has become the talk of the town. For more information, visit What is smart ownership in real estate properties?

(B) Navigating Tax Implications in Indian Real Estate Investments

Before diving deeper, let’s understand the taxes applicable to real estate investments in India.

Real estate, classified as a ‘Capital Asset’ by Section 2(14) of the Income Tax Act, 1961, introduces tax considerations for investors. The application of taxes hinges on whether the gains incurred fall under ‘Short Term Capital Gain Tax’ or ‘Long Term Capital Gain Tax,’ determined by specific circumstances.

(B.1) Types of Taxes on Real Estate Investments

In other words, three primary taxes come into play in the property transactions in India  namely-

• Capital Gains Tax
• Property Tax
• Wealth Tax

These taxes are interconnected with distinct implications at different stages of property ownership.

Go through the following table for detailed information-

(B.2) Capital Gains Tax: Unraveling Profit on Real Estate Sales

The profit obtained from the sale of real estate assets is treated as capital gains. To assess the tax liability on these gains, a crucial classification is made based on the duration of asset holding-

• Short Term Capital Gains: If the asset is held for less than 36 months from the acquisition date (i.e. sold within 3 years of purchase).
• Long Term Capital Gains: If the asset is held for more than 36 months from the acquisition date (i.e., sold after 3 years from the date of purchase/registration, whichever is later).

(B.3) Tax Rates Based on Capital Gains Classification

Once the gains are categorised as short term or long term, distinct tax rates come into play-

• Short Term Capital Gains: These gains are added to your total taxable income for the year of the property sale and taxed at your applicable slab rate.
• Long Term Capital Gains: Taxation occurs at a rate of 20% on gains exceeding Rs.1 lakh.

(B.4) Sage Advice: Consult a Tax Advisor

Given the intricacies of real estate tax implications, seeking guidance from a tax adviser is paramount. Before embarking on real estate investments, consulting a professional ensures a comprehensive understanding of tax obligations and opportunities for optimization.

Thus, understanding the nuances of taxes applicable to real estate investments empowers investors to make informed decisions, potentially mitigating tax burdens and optimizing financial outcomes.

(C) Smart Strategies to Invest in Real Estate while Saving Taxes

Real estate investments in India, while lucrative, often come with substantial tax implications. The inherent complexity of real estate transactions contributes to higher associated taxes. However, employing clever strategies can significantly minimize the overall tax outgo. 

Let’s explore some insightful tactics to invest in real estate while keeping tax burdens at bay.

(C.1) Buying and Selling Real Estate via REITs

Traditionally, real estate investment without a hefty home loan was challenging for the middle class. Enter Real Estate Investment Trusts (REITs), offering a game-changing opportunity. Investors can now participate in real estate with as little as Rs 10,000. REITs pool funds from multiple investors to finance income-generating commercial properties. Though investors don’t technically ‘own’ the properties, they enjoy the right to the income generated.

(C.2) Tax Advantages of REITs

REIT units, traded on stock exchanges, incur Short Term Capital Gains (STCG) or Long Term Capital Gains (LTCG) upon sale. To minimize taxes, investors can strategically sell limited units over time, ensuring overall LTCG remains below Rs 1 lakh. Unlike physical properties, REIT units offer flexibility in selling individual units.

(C.3) Additional Tax Breaks

REITs, akin to mutual funds, enable collective real estate investments. Notably, they qualify for significant tax breaks. Interest and dividend payments received by a REIT via a Special Purpose Vehicle (SPV) are tax-free, providing investors with additional financial advantages.

(C.4) Avoiding GST on ready-to-move-in Properties

Opting for a ready-to-move-in property can be a savvy tax-saving strategy. Buyers of such properties with an Occupancy Certificate are exempt from paying Goods and Services Tax (GST). While ready-to-move-in properties often come with a higher initial cost, the reduced tax liability and lower associated risks make them an attractive option. This will definitely help you in saving taxes.

(C.5) Embracing Fractional Ownership

This is one of the most affordable real estate investments. Fractional ownership presents a novel approach for those unable to afford an entire property. This method involves pooling funds with a group to collectively purchase a property. With initial contributions as low as 5-10% of the property cost, fractional ownership makes high-value properties accessible.

(C.6) Tax Benefits of Joint Ownership

This is another brilliant move for saving taxes. Investing through joint or fractional ownership provides opportunities to optimize taxes. Income and capital gains on jointly owned properties can be taxed based on specified ownership ratios, offering potential tax savings. This strategy becomes particularly beneficial when co-owning with a spouse, allowing for exclusive income taxation based on the ownership ratio.

(C.8) Agricultural Land Investment

As you have read in the previous sections, agricultural land investment is one of the most efficient ways for saving taxes. Investing in agricultural land opens avenues for substantial tax relief, especially when used for income-generating activities like farming or animal husbandry. However, exemptions vary based on location and state regulations. In urban areas, exemptions may be limited or non-existent, emphasizing the need for thorough research before such investments.

(C.9) Crowdfunding for Real Estate

Participating in real estate crowdfunding can lead to tax deductions. Investors can claim a 1% tax deduction on Tax Deducted at Source (TDS) for the entire investment amount. Additionally, deductions on interest payments from property management or developers are available on annual interest payments exceeding Rs.5000.

(C.10) Taking the Advantage of the Home Loans

Investing through a home loan is a prevalent strategy for claiming deductions on rental properties. Section 24(b) allows a deduction for interest paid, up to Rs.2 lakh, for the acquisition of residential property. While this deduction is applicable post-construction completion, pre-construction EMIs become eligible for discounts in five equal payments upon project completion.

Thus, navigating the complexities of real estate taxation in India demands a strategic approach. Employing these clever strategies not only makes real estate investments accessible to a broader audience but also ensures tax efficiency, ultimately optimizing financial outcomes.

(D) Tax Benefits on Real Estate Investments

Investing in real estate not only offers the promise of financial growth but also opens the door to a plethora of tax benefits. Let’s delve into the intricacies of these advantages, making the tax landscape more accessible.

(D.1) Home Loan Tax Benefits

Investing in real estate through a home loan brings forth a cascade of tax benefits, offering substantial relief. Here are key deductions you can claim-

• Deduction on Interest Paid: When you opt for a home loan for property purchase or construction, you can claim a tax deduction on the interest paid. The interest on home loan Equated Monthly Installments (EMIs) is deductible from the total income, up to a maximum of Rs.2 lakhs. Notably, there’s no upper limit for interest deduction on a let-out property.
• Deduction of Principal Repayment: The principal amount repaid through home loan EMIs is also eligible for deduction, up to a maximum of Rs.1.5 lakhs. However, this deduction comes with a condition – the house property should not be sold within 5 years from the sale date.
• Deduction for Stamp Duty: In addition to principal repayment, you can claim deductions for stamp duty and registration charges under section 80C, within the threshold limit of Rs.1.5 lakhs. It’s important to note that these deductions are applicable only in the year of incurring the expense.
• Additional Deductions: First-time homebuyers can rejoice as an additional deduction of Rs.50,000 under section 80E is available. To qualify, the loan amount should be less than Rs.35 lakhs, the property value should be under Rs.50 lakhs, and the individual must be a first-time homebuyer.
• Additional Deduction u/s 80EEA: Section 80EEA extends a deduction of up to Rs.1.5 lakhs, subject to conditions like a property stamp value not exceeding Rs.45 lakhs, the individual being a first-time homebuyer, and not already claiming the 80EE deduction.
• Deduction for Joint Home Loan: For those opting for a joint home loan, each co-owner can individually claim a deduction of up to Rs.1.5 lakhs under section 80C for principal repayment and up to Rs.2 lakhs under section 24B for interest on the home loan.

(D.2) Rental Income Bliss with Standard Deduction

Standard deduction, a boon for rental income in India, offers relief as soon as you become a property owner. Assumed repairs and maintenance, even without actual expenses, allow you to claim a deduction of 30% on the rental income.

(D.3) Tax Reductions with Depreciation

Depreciation, often overlooked, can significantly reduce tax liabilities for homeowners. As real estate properties experience wear and tear, reinvestment in repairs and maintenance becomes essential. Homeowners can claim a deduction for the amount invested in these endeavors along with depreciation.

Hence, these tax benefits become the secret sauce for savvy investors, turning their investment journey into a tax-efficient financial venture. As you navigate the world of real estate, keep these tax strategies in mind to make the most of your investment endeavors.

(E) Wrapping Up: Real Estate Investments for Saving Taxes

Now, its time to wrap-up. We discussed various smart strategies for  buying real estate while saving taxes. 

Common approaches include utilizing real estate tax write-offs, leveraging deductions to offset income, owning properties in a self-directed IRA, and holding onto properties for more than a year to qualify for favorable tax treatment. Additionally, you can minimize taxes through strategies like 1031 exchanges and cost segregation studies.

For those who pay taxes, it’s crucial to explore ways to lower tax costs. These methods can significantly reduce the overall taxable amount for a given fiscal year. Another avenue for a tax break is purchasing a life insurance policy. Understanding how to minimize taxes is vital, and exploring alternative possibilities to maximize earnings is equally important.

Real estate stands out as a promising option, not just because owning a home is a common dream, but also because it serves as a long-term financial investment that tends to appreciate over time.

All you need to do is to take advantage of various benefits available to real-estate investors by becoming the one!