Real Estate Types And Its Impact On Tax Planning

Real estate is simply a land and any refinement on it. According to businessdictionary, land and anything fixed, immovable, or permanently attached to it such as appurtenances, buildings, fences, fixtures, improvements, roads, shrubs and trees (but not growing crops), sewers, structures, utility systems, and walls. Title to real estate normally includes title to air rights, mineral rights, and surface rights which can be bought, leased, sold, or transferred together or separately. Also called real property or realty.

Though there are broadly two broad categories of real estate type, namely residential and commercial property, the  real estate industry is much more precise when it comes to classifying property types. Below is a list of different types of real estate categorised under two broader sections:

Residential:

  1. Eco-friendly housing property: Recent development in construction technology have made it possible for home builders to live in an eco-friendly environment now, more than ever. Houses made of eco friendly material are made of natural building materials such as wood, dirt straw and clay,  which prevent further pollution thus enabling a sustainable lifestyle. Green energy products are  lighter, thinner and stronger to use. Green materials are safer for the people living in the homes too. Eco-friendly houses are also energy efficient.
  2. Multifamily property: These type of property consists of  multi-story detached buildings. Wherein each floor is a separate apartment.
  3. Terraced house property:  These types of property consists of a number of single or multiple buildings in a continuous row with shared walls and no intermediate space.
  4. Single family detached housing property: This type of property consists of an individual housing property, like an  archetype house models. It consists of individual housing system, own garden swimming pool etc. It could be in a residential area or away from the city.
  5. Single apartment: A one bedroom apartment is mostly referred as  a single apartment. It basically consists of a bedroom, a kitchen, a living room and a bathroom.
  6. Duplex: A duplex  has two units with one commonly shared wall. A building comprising two attached units on two distinct properties  can also be referred as a duplex. It is quite in demand nowadays
  7. Studio apartment: A studio apartment refers to a single large room that also contains  a kitchen and a bathroom in it.It is a typically a large room, with different areas of the room used for varied purposes.
  8. Condominium properties. Also known as the condo it is the form of the housing  wherein a specified part of a piece of real estate is individually owned.  Other parts such as parks, gardens  and common areas within the complex are shared as well as owned  jointly.  

Commercial:

  1. Industrial properties: Property types that are used for industrial use like the distribution, manufacturing or warehouse facilities. Heavy manufacturing buildings to flex warehouses every building comes under this category
  2. Office properties: The properties that mainly  used for office space. Office properties are generally classified based on their location as in inside the city or Suburban
  3. Retail properties: RCA classifies retail properties as either strip centers or mall and other. Strip center, community retail center, power center, malls everything falls under this category.
  4. Hotel: A hotel is that  establishment that provides lodging and sometimes meals, entertainment and various personal services for the public. Full services hotels, limited service hotels as well as extended stay hotels everything comes under this.
  5. Development Sites: A set of land or an already existing structure to be demolished for the purpose of new construction is categorised as development sites. Infill land and brownfield land fall under this category.

Tax Planning:

Property investment is an asset for the buyer. Your investment of today might fetch you huge junk of money in the future. Other than that having a home is truly an asset for owners and his family members.

Indian real estate market has become one of the most preferred destinations in the Asia Pacific1 as overseas funds accounted for more than 50 percent of all investment activity in India in 2014, compared with just 26 per cent in 2013. The Indian real estate market is expected to touch US$ 180 billion by 2020. The housing sector alone contributes 5-6 per cent to the country’s Gross Domestic Product (GDP). Source.  

You can invest in either residential or commercial property types. However, advantages in case of tax are more in regard to residential properties. Let’s have an insight on how tax planning could be done in both of them.

Residential Property: Laid down below are the tax benefits of owning a residential property.

  • Income tax act lays down the provision that self-occupied residential property is completely exempt from income tax. In case you buy another property and if they are used for your residence only self-occupied residential property will be exempt from tax.
  • Under the provisions of Section 24 of the income tax act, a maximum of Rupees 2 lakhs is allowed against money borrowed for the purchase of a self-occupied residential property. This’ loss’ from house property can be set off against any other source of income such as salary.
  • In the case of a property rented out, there is no limit on the deduction for the interest paid and actual interest paid can be claimed as a deduction from housing income.
  • In case of the property type that is let out, post-tax interest cost will be as lower as the entire the entire amount of interest is allowed as a deduction while calculating taxable income
  • In regard to an under-construction property, the interest deduction will not be allowed from taxable income until the construction is done with. But the aggregate interest paid on the home loan during the period before completion can be claimed as deduction in five equal instalments starting with the year of completion
  • In case of more than one property owner all the individual owners are entitled to tax benefits
  • Additionally, upon interest deduction, you can also claim repayment of the municipal amount on a home loan as well as stamp duty incurred in the purchase of a house up to maximum of 1.50 lakhs.

Commercial Property: The income tax rules in case of commercial property types tax rules are as almost as laid out in the case of residential properties. Additionally, here are few more advantages.

  • If you own a property for more than 36 months it will be treated as a long-term capital asset and you can expect huge profits from the property.
  • The capital gains will be enumerated after taking into consideration of indexation benefit on the investment.
  • The capital gains earned can be invested in an another property and as such tax can be avoided.

So, next time keep these pointers in mind while investing.

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Curated by a Building Expert from Wienerberger India

For an expert advice, drop a word at our email id gosmartbricks@gmail.com

[Tax information details collected from Times Property, newspaper edition of July 1, 2016, Bangalore.]

 

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