All that you need to know about Second Hand Taxation

Some of the primary factors that must be kept in mind while purchasing more than one properties are that either one of the two properties will be self-occupied while the other will remain rented. Both properties will have separate tax treatments!

Buying a second home can be a choice many people make as it can be an investment. A farmhouse or a holiday home for you to relax and unwind. Even an option, for an individual to get a regular source of income, in the form of rentals. With the real estate scenario changing by the minute, with great appreciation in value of the properties, influencing and making many investors take the plunge into buying these homes. This kind of homes generally, have their tax implications for the buyers. Taking a home loan can ease this financial liability.

Important Factors to consider before purchasing Multiple Properties:

  1. One of the properties under you name will be considered self-occupied while the other will be considered rented out.
  2. The self-occupied and rented out properties will have different tax treatments on your home loans.

Second Home and it’s Taxability:

The market value of the properties owned by you will play an important role when it comes to your loan process. Your taxable amount on those properties will be calculated based on the below mentioned scenarios:

Scenario 1:

If you have rented out one of your properties, and this is allowing you to have a regular source of income, the tax for this property will be treated as Income from House property. After paying interests, taxes paid to municipal authorities, any other deductions will be your income.

Scenario 2:

If you are residing in the property or it is unoccupied, then the deduction of tax will be a nominal amount of the rent expected from that property.

Tax benefits of purchasing second home.

For your second home, you can get a tax reduction on a few parameters as mentioned below:

  1. Housing Loan Interest: For your second property in which you reside, if you have repaid at least Rs. 1.5lakhs towards the principal, you will get a tax deduction as per section 80C of the Income Tax Act 1961, . For the home you own which is vacant or leased, you can claim the home loan interest amount as deduction. This deduction will not have an upper limit.
  2. Joint Home Loan Deductions: Each applicant will be eligible for deductions, when the property is owned jointly. The tax payable will be as per the tax slabs of the respective applicant as well as the value of the property.

  3. Taxes to Municipal Authorities: Municipal authorities will allow deduction only for current financial years and not for the year the tax invoice was raised. So it’s always a good practice to keep track of these payments. As per the Income Tax Act of 1961, municipal taxes is deducted against the rental income received in the financial year.

  4. Standard Deduction: There is a flat 30% deduction of the taxable value of your property on maintenance related expenses such as house repairing, insurance, etc. This a deduction is offered irrespective of the actual expenses made for the property.

  5. Tax on the Property that is cheaper: If you own 2 different properties, where the value of one property is less than the other, it is always beneficial to pay taxes on the property of lesser value.

There are pros and cons to owning a second home or property, but you may also want to consider the possibility of paying wealth tax.

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