How can real estate investment benefit from tax planning?

Mar 15, 2024 3:43:45 PM | Real Estate Investment How can real estate investment benefit from tax planning?

Investing in real estate can save you taxes in multiple ways. It reduces your taxable income by using deductions and exemptions.

Tax. A word that every earning individual dreads.

What makes you fear tax? Is it the possibility of you losing a chunk of your income? What if I tell you that proper tax planning is all you need to pay and save on tax?

What is Tax Planning?

Tax planning is how you efficiently and effectively reduce tax liability. Our government has streamlined specific deductions and exemptions per the respective tax brackets.

A great way to plan your taxation is to invest in real estate.

tax planning and real estate

What is Real Estate Investment?

Real estate investment involves purchasing property to generate income or capital appreciation. It's a popular choice among people as it offers a sense of security and the potential for long-term returns.

Imagine you buy a house and later sell it for more than you paid. That extra money you make is a capital gain. It's the same for land or a business building. These gains can be taxed differently depending on how long you owned the property. If you owned it for a short time, the tax will be higher. But if you owned it for a long time (usually more than a year), the tax rate is typically 20%.

What are the Types of Real Estate Investment Options?

SAA categorizes real estate investment as mentioned below:

  • Ownership: Ownership is the most traditional method of real estate investment. Once you've purchased the property, it falls under your discretion to either rent it out for a steady income source or hold onto it for capital appreciation over time.
  • REITs- Real Estate Investment Trusts or REITs allow you to invest in a portfolio of income-generating properties without directly owning them. They offer diversification and liquidity, but returns may be lower than direct ownership.

Investing in real estate can save you taxes in multiple ways. It reduces your taxable income by using deductions and exemptions. A few other popular ways are renting it out and property depreciation.

Here is a list of tax benefits that you can avail out of real estate investment:

1. Tax Benefits from Home Loan- Whether you're a first-time homebuyer or you've decided to reconstruct your place, a home loan always comes in handy. Listed below are the necessary deductions you can claim:
  • Save tax on interest: Claim deduction up to Rs. 2 lakhs on the interest portion of your home loan EMI for self-occupied property (no limit for rented property).
  • Reduce taxable income: Deduct the principal amount you repay on your home loan, up to Rs. 1.5 lakhs, from your taxable income. But hold on to the property for 5 years after claiming this benefit.
  • Get tax benefit for fees: Registration and stamp duty charges can be deducted along with principal repayment, under the Rs. 1.5 lakh limit of section 80C. Claim them in the year you incur the expense.
  • Extra tax break for first-timers: If it's your first home and the loan amount is under Rs. 35 lakhs (property value under Rs. 50 lakhs), you can save an additional Rs. 50,000 on taxes.
  • Even more tax savings (conditions apply): First-time home buyers meeting certain criteria can claim an additional deduction of up to Rs. 1.5 lakh under section 80EEA (cannot be combined with section 80EE benefit).
  • Shared benefits for joint loans: When taking a home loan jointly, each co-owner can claim separate deductions for principal repayment (up to Rs. 1.5 lakh) and interest payment (up to Rs. 2 lakh).
2. Depreciation of Property- When an asset loses its value over time due to prolonged use and wear and tear, it is termed depreciation. The financial statements recognize depreciation as an expense. Hence, charging depreciation would lower the tax every year. The amount spent on renovations and modifications of the house can also be charged along with depreciation.

3. Standard Deduction for Rentals: Owning rental property requires assumed wear and tear. To help offset repair costs, the Indian government offers a standard deduction. Regardless of your actual repair expenses, you can deduct 30% of your gross rental income. This lowers your taxable income and potentially reduces your tax bill.

tax benefits real estate

The Bottom Line

Real estate investment offers a unique opportunity to build wealth and security while also reducing the tax burden. Whether through ownership or REIT investment, real estate investment can turn out to be a powerful investment tool. As investment is a difficult concept, let alone real estate investment, consult a tax advisor, to see if real estate investment aligns with your financial goals. It will also help you understand the specific tax implications based on your tax slab.

Written By: Team SAA