How to invest in real estate smartly to save tax

As the saying goes, "a penny saved is a penny earned.". Tax planning is one method for lowering your tax burden when investing in real estate and increasing your revenue.

Share on facebook
Share on twitter
Share on linkedin
How to invest in real estate smartly to save tax

Income tax is the tax that an individual must pay on their earnings. They provide significant money for the government and are critical to the proper operation of government operations. They are also required if the country is to advance economically and thrive. The tax is also calculated based on your income level. Yes, you heard it right! You and I must pay taxes.

Every year, we get reminded by the taxman, the chartered accountant, or our employers that it is tax season. Most likely, your reaction will not be as if you received the latest iPhone. Let’s be honest about it: most of us detest paying taxes. Also, at some point in our lives, we’ve all fantasized about living in a tax-free country.

Aside from the fact that taxes get perceived as a financial burden, a lack of awareness about tax preparation may add to the stress. The bulk of taxpayers have difficulty putting the tax-saving component into their investing equation. Perhaps it is time to begin teaching taxes to children while they are still in school, to prepare them for the inevitable as adults – taxes.

Real estate has long gotten regarded as one of the most popular investment vehicles among investors. The reason for this is that real estate has provided huge returns in a short period, throughout the first decade of the twenty-first century. However, persons participating in the real estate market are somewhat unaware of the taxes, particularly the Long Term Capital Gain (LTCG) tax. They are also unaware of the exemptions that the government provides to real estate investors. According to tax and investing experts, investors unaware of this levy may find themselves in hot water. The income tax statute allows for deductions for different investments, savings, and expenditures made by the taxpayer within a fiscal year. 

Everyone wants to invest in a real estate property that will provide a consistent stream of income. Every one of us wants to invest in real estate that earns income rather than costs. 

Also read: 8 Legitimate methods to reduce tax on your passive income from real estate!

But the problem is tax.

So, how can we smartly invest in real estate to save tax? 

But, firstly, we must understand the tax laws applicable to real estate investments.

So, what are the taxes applicable to real estate investments?

Real estate tax laws are a crucial element of every venture. Investors are constantly on the lookout for high-yielding investment opportunities that are also tax-efficient. It is reasonable for investors to believe this since, in the end, even if you receive fantastic returns and pay half of the earnings in taxes, the investment is worthless. As a result, each investor must have a good understanding of the Tax Laws for Real Estate. 

Real estate is regarded as a ‘Capital Asset’ under Section 2(14) of the Income Tax Act, 1961. Hence, capital gains are liable to ‘Short Term Capital Gain Tax’ or ‘Long Term Capital Gain Tax,’ depending on the situation.

Also read: Tax Laws for NRI Investments in India: Income Tax and Tax Complications

  • Long-term capital gains: Long-term capital gains are when a property gets kept for longer than three years. Long-term capital gains benefit more from low tax rates than short-term capital gains. Long-term capital gains get taxed at a rate of 20%. Long-term capital gains are also ineligible for tax deductions. However, capital gains from the sale of any long-term asset can be claimed under Section 54EC if invested in notified bonds within six months after the asset’s transfer. Only income over the exemption limit is taxed if your total income is less than the exemption limit. Long-term asset losses can only get offset by capital gain income.
  • Short-term capital gains: Real estate is more profitable in the long run since it also has tax advantages. Short-term real estate investment is not only dangerous, but it also necessitates more taxation. The income generated by short-term gains gets taxed at a rate of 30%. However, unlike long-term profits, short-term losses can potentially be offset by long-term gains.

Also read: How to Save Capital Gain Tax on Commercial Property Sale.

What are the real estate investment options to save tax?

  • REITs: REITs are similar to mutual funds. Several investors combine their money to invest in real estate. However, the assets get managed by a designated Manager in both situations. However, the underlying asset of a REIT is generally real estate holdings or loans secured by real estate. REITs are also eligible for a few significant tax breaks in India that other forms of Real Estate firms are not. Interest and dividend payments received by a REIT via a Special Purpose Vehicle (SPV) are tax-free. In this sense, an SPV is a domestic firm where the REIT owns at least a 50% share. A REIT may possess 50% or more of a number of SPVs that own specific real estate properties on its behalf. Any revenue derived from renting or leasing real estate assets directly owned by the REIT (rather than through an SPV) is likewise tax-free.

Also read: Indian Income Tax Rules Favour REIT Investors To Earn High Profits.

  • Fractional ownership: If you invest through joint ownership, you must pay taxes on rental income and capital gains on the sale of the property. You must pay the same amount of tax as if you were the only owner of the property. However, if you own a rental property with your jobless spouse, you can save tax by making a change. When a property is co-owned, income is taxed exclusively based on the ownership ratio specified in the property’s title deed. All property owners can claim standard deductions separately, allowing you to lower your tax burden. To lessen your tax burden, you can also invest through joint or fractional ownership. If you are searching for a fractional ownership project to invest in, Assetmonk can be your investing partner. We provide commercial real estate properties with rental revenue under our Return Category offerings, with an estimated rental yield of 8%.
  • Crowdfunding: According to TDS, a person who makes a payment to another gets entitled to a tax deduction. If you invest in rental real estate, you can claim a 1% tax reduction on TDS on the entire amount paid by you at the time of investment. You can claim a TDS deduction on the interest paid by the property management or developers if you invest through crowdfunding. This deduction is available on annual interest payments over Rs. 5000. 

Also read: Tax Implications on Real Estate Crowdfunding in India Made Simple: What You Need to Know

  • Home loan: Investing through leverage is one of the most prevalent strategies to claim a deduction on your rental properties. When you borrow money to purchase a home, you can deduct the interest you pay on the loan. However, this deduction is only available for the acquisition of residential property and not for the purchase of a commercial property. Section 24(b) allows you to claim a deduction for interest paid up to Rs.2 lakh. However, the section’s advantages cannot get claimed before the construction gets completed. If you pay EMI during the pre-construction period, you may claim a discount in 5 equal payments when the building gets completed.

Also, read: Wanna save tax on your rental investment? Here is everything you should know!

One of the most crucial topics to address if you are a tax-paying citizen is how to lower your tax costs. All of these methods can be employed to lessen the overall taxable amount for a given fiscal year. Other ways to earn a tax break also include purchasing a life insurance policy. It is vital to understand how to minimize taxes. It is also important to examine alternative possibilities to maximize your earnings in addition to the deductions. Real estate is one of the better possibilities since owning a home is a dream for many people. Real estate is also a long-term financial investment that grows in value over time.

How to invest in real estate smartly to save tax FAQ'S:

Yes, you can.  You can save tax by investing in REITs, CRE crowdfunding, fractional real estate ownership, and home loans.

Investors can save property taxes by investing in REITs, CRE crowdfunding, fractional real estate ownership.

Related Articles

istockphoto 1394977436 612x612 1

Commercial Real Estate Leases: Different Types and Which Is the Best?

Leasing commercial space is a significant financial commitment and requires commercial real estate leases. These leases can be intimidating, especially because they are a huge commitment that can be costly. However, they are not as difficult as many people believe. A commercial real estate lease, like most other legal transactions, should not be taken lightly. As a result, when renting commercial space for the first time, it is critical not only to thoroughly study the industry but also to have a good understanding of the many forms of commercial leases accessible in India. Also, read Commercial Real Estate Is Booming In 2022: Explore How You Can Also Profit Via This Alternative Investment. Here’s an explanation of the many forms of commercial real estate leases and what they imply for renters and landlords: Firstly, what are commercial real estate leases? Commercial leases, as opposed to residential leases, are an arrangement between a renter (company) and landlord that specifies the property only…

Read more
istockphoto 817688664 612x612 1

The Indian real estate market would be worth $1 billion by 2030: RBSA Advisors

According to RBSA Advisors, the real estate business gets expected to grow by 15% by 2030, reaching $1,000 billion. According to RBSA Advisors, the Indian real estate sector would grow at a 15% CAGR from $60 billion in 2010 to $1,000 billion by 2030, contributing 13% of the country’s GDP by 2025. The organized retail real estate industry get expected to rise by 28% to 82 million square feet by 2023. Per “The Outlook of the Real Estate Sector in India,” the Indian real estate sector is showing strong indications of recovery as the economy recovers from the pandemic. Also, read JLL reports Indian real estate garnered $943 million in investments worth in Q1 2022. Despite a little increase in prices and a slight increase in home loan interest rates, the real estate industry has thrived on good buyer enthusiasm. According to the poll, there is substantial demand for property in Delhi-NCR across all price levels. The entire increase in…

Read more
istockphoto 1394786542 612x612 1

Aspire to be A Top Commercial Real Estate Agent? Here are Some Critical Steps To Becoming One

Do you want to be a successful commercial real estate agent? The Indian real estate market is diversified but vibrant and competitive, particularly for commercial real estate agents. To build a successful niche, they must comprehend the shifting promotional circumstances of developers as well as customer preferences. Staying current and afloat in the market requires innovation and openness to new marketing concepts. Follow the steps below to be a top agent. Do you want to be a successful commercial real estate agent? If this is the case, the first question you must answer is whether you want to work in commercial or residential real estate. To be sure, because individuals are more likely to buy or lease a place to live rather than a location to operate a company, it is simpler to get into residential real estate – where there will always be more prospective clients and transactions. Commercial real estate, on the other hand, may attract a large…

Read more
istockphoto 1263914795 612x612 1

Real Estate Investments: The Hottest Alternative Investments You Do Not Want To Miss Out

One of the best ways to grow your money in the modern era is by making investments. Whether small or large, every investment has got the potential to be a profitable one. It wasn’t long ago that people only knew about the stock market as a primary investment method. But, this has changed pretty much with the arrival of better technologies for making investments and making profits out of them. The hottest topic in the domain of investments is the growing popularity of alternative investments such as real estate. The real estate industry has been in existence for a long time, but it has changed a lot from its original form. Better alternative investments are emerging in real estate, mostly due to innovations introduced by technical firms. There’s still much to learn about this, so don’t worry. We have explained everything about this trending topic in this blog post. Do not miss Aspire financial freedom. Find Out How Real Estate Investment…

Read more
istockphoto 953511340 612x612 1

A hike in housing sales across India in 2022

Despite increasing mortgage and housing rates, India’s residential market is predicted to maintain demand pace this year, with sales likely to exceed the demand that was before the pandemic, at a peak of 2.62 lakh units, according to industry stakeholders. After enduring four consecutive interruptions in the shape of demonetization, RERA, GST, and COVID-19 in the last six years, industry analysts believe the housing market is undergoing fundamental changes and is now at the commencement of a long-term implicit. The FPCE, a homebuyers’ organization, attributes the better buying sentiment to the Real Estate Regulatory Authority (RERA) established under the Real Estate (Regulation and Development) Act of 2016. All major publicly traded real estate developers reported record-breaking bookings in the previous fiscal year and have stated that their sales statistics in FY ’23 would be much better. However, if the entire market is considered, rather than just listed businesses, the RBI’s move to increase the interest rate by a total of…

Read more
istockphoto 973712582 612x612 1

Office space demand recovery gets broad-based as small, mid-sized deals pick up

The pandemic had a significant negative impact on the commercial real estate sector. Public gatherings were outlawed to slow the spread of the virus, which put a stop to corporate demands for office space. Numerous developments are coming in from all over the world as things are improving every day. A solid recovery is taking place in the commercial real estate market, especially in the small- and medium-sized office space segment. Since the beginning of this year, both the volume of direct transactions and lease agreements have significantly increased. Deals are being secured across a broad spectrum, with the majority involving office spaces between 10,000 and 50,000 square feet. The 10,000–50,000 square foot commercial office space is starting to see an increase in transactions, according to Real Estate Investment Trusts (REITs) and many other well-known builders with a sizable portfolio. Surprisingly, additional transactions that go above and beyond the upper limit are also being recorded. What does that imply? Due…

Read more