The allure of purchasing a second home is enhanced by the convenience of readily available home loans as well as the opportunity to rent out the property.
However, there are tax repercussions associated with transacting in real estate, regardless of whether you are buying, selling, or renting out the property, which you should think about before getting involved.
Taxation on sale of first property
If you plan to sell your first property and then buy a second property, you should be aware that if your first property was purchased with a home loan, you will lose all of your tax benefits, with the exception of the interest paid on the loan, under Section 24B if you sell property within five years of the financial year in which you bought it. This is the case even if you pay off the loan interest.
You may be eligible for a tax break on any capital gains that result from the sale of a piece of property if you use the proceeds from the sale to either buy a new home within the first two years or build a new home within the first three years after the sale.
In order to qualify for this tax relief, you must have owned your property for at least a year prior to the date that the transaction actually took place.
Paying interest on second home loan
You may be eligible for tax deduction of up to Rs. 150,000 for principal payments in accordance with section 80C of the Income Tax Act. Additionally, you may be eligible for a deduction of up to Rs. 200,000 in accordance with section 24(B) for home loan interest repayments if you are currently living in a home for which you have taken out a home loan.
If you decide to buy another property after having already taken out a second home loan, you will not be eligible for any tax deductions related to the principal amount that you pay back on your home loan. On the other hand, there is no cap on the amount of interest that can be deducted from your taxes for the repayment of your second home loan.
Therefore, if you pay an interest payment of Rs. 500,000 during the fiscal year, you would be able to deduct the entire amount from your taxes.
You are also eligible for a deduction equal to twenty percent of the total interest that is expected to be paid during the pre-construction phase if your second property is currently undergoing construction. This deduction is valid for a period of time extending up to five years.
Tax benefits for owning two properties
When you own two properties, there are a variety of tax implications and benefits to consider depending on the specifics of the situation.
1: One of his house is self-occupied and second house is rented out
When you own more than one piece of real estate, you have the option of treating one of them as a residence that you occupy yourself. The second is known as a DLOP, which stands for designated let out property. Now, according to the IT Act, if you rent out your second property in order to earn rental income, the income that you earn from renting out your second property is fully taxable.
On the bright side, you are eligible to take a standard deduction equal to thirty percent of the money you make from renting out your property to pay for upkeep. Additionally, if you have purchased your second home with the assistance of a mortgage loan, any interest payments that you have made on the mortgage are exempt from taxation.
For illustration's sake, let's say the rent you collect from your second property totals Rs. 200,000 per year. In addition, on the assumption that you have paid Rs. 150,000 toward the repayment of the interest on your home loan, the following is how your taxes will be calculated:
The amount of Rs. 200,000 that is remaining after municipal dues have been deducted from rental income.
Standard deduction multiplied by thirty percent = 60,000 Indian rupees
The total amount of money obtained from rent is equal to Rs. 200,000 minus Rs. 60,000, which equals Rs.
The amount of money that was paid to repay the interest on the mortgage was 150,000 rupees.
The total tax liability or benefit comes to 10,000 rupees, which is calculated by subtracting 150,000 from 144,000.
When it comes time to file your income tax return, you have the ability to make a claim for a tax benefit in the amount of Rs. 10,000 because you rent out your second property.
2: Both properties are rented out
If you choose to rent out both of your properties, any income that you receive from the rental of either or both of them will be subject to income tax. After deducting municipal dues, thirty percent for maintenance, and one hundred percent of the interest paid on both of the corresponding home loans, the total tax liability would be calculated. There would be no cap on the amount of interest that could be deducted.
3: None of the properties are being rented out
If you do not use any of your properties as rental units, you will be required to occupy only one of them as your primary residence. If you have a second property, it will be presumed that it is rented immediately, and any income you receive from the rental of that property will be considered part of your taxable income. You have the option of deciding which of your properties will be used for your own occupancy and which will be rented out.
If you take the time to calculate your potential tax liability prior to purchasing a second home, it is possible that this investment will turn out to be profitable for you as an asset.