Unlock the Secrets of Smart Property Tax Management for Real Estate Investors

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India's real estate sector is expanding, with many opportunities for future expansion. According to Mordor Intelligence, the market is currently worth USD 265.18 billion and is expected to increase at a CAGR of 25.6% by 2028, reaching USD 828.75 billion in total. Despite the present rise following the pandemic, real estate has always been a secure shelter for investors seeking long-term profits. Similarly, for developers, it is a profitable path because it allows several options to not only demonstrate modern architecture but also generate a significant ROI.

However, profits earned are subject to relevant property taxes, which an individual or a limited liability business must pay to the government. Avoiding this payment results in a fine and, in some situations, harsh legal action. Regardless of the conditions, there are always methods to save money on taxes if you have the correct strategies. This article examines some of the clever tax tactics that could help investors and developers save money in taxes.

Smart tax-saving Ideas

If you are a real estate investor, you may have to pay a variety of taxes, including municipal corporation tax, goods and services tax (GST), stamp duty, registration fees, and others. With so many taxes, it's difficult for an individual to design a perfect approach for any one tax. However, with the combination of many smart techniques, a collective favorable outcome can be achieved.

Save on depreciation

While real estate can appreciate dramatically in value, it is also prone to depreciation. As a result, both investors and developers employ this method to reduce their property taxes. Depreciation can be used to demonstrate the loss of value of a property, which can dramatically lower taxable income for both investors and developers. The actual use of depreciation deductions allows individuals to avoid tax while still retaining a significant percentage of their earnings. According to the Income Tax Act, the annual depreciation rate for residential properties is 5%, while for non-residential developments it is 10%.

Benefits of Joint Ownership

Another profitable option for both investors and real estate developers is to jointly own a property. Section 80C of the Income Tax Act gives relief of up to Rs. 1.5 lakh for properties owned jointly by co-owners and financed with a home loan. Furthermore, if the co-owners generate a rental income from the property, they can divide the rental or capital gains in a way that reduces their overall tax liability. This method may be more effective if the other owner is in a low tax bracket.

Investment in agricultural land

Agricultural land in India is not only a profitable investment opportunity, but it may also be an excellent tax-saving technique for investors. According to Section 54 of the Income Tax Act, agricultural land is not considered a capital asset, hence no capital gains tax is levied on its sale. This is why this form of land is profitable in terms of both income and tax savings. Aside from these benefits, the owners can use the land for other benefits such as organic farming or fractional holdings, which can provide a passive source of income.

Strategic investments

Investors and developers must time their investments to avoid excessive taxes. To avoid a late penalty, short-term buyers and sellers must consider the tax deadline. Furthermore, the timing of purchasing building materials or making repairs early in the year is critical for developers because these actions qualify for immediate tax deductions. One effective method is to invest in 54EC bonds, which allow investors to deduct up to Rs 50 lakh on capital gains from the sale of a flat. However, one must only buy the 54EC bonds, which are issued by the Rural Electrification Corporation (REC) and the National Highways Authority of India (NHAI).

All things considered

For a long time, real estate has provided investors with security through quick value appreciation, rental opportunities, and long-term reliability. However, with large capital gains come a slew of taxes that can be overwhelming for home sellers. To dramatically minimize these taxes, one can use a variety of tactics, including depreciation deductions, investing in agricultural land, jointly owning a property, and strategically timing their investment.

The real estate market is expected to rise in the near future. Those who are ready to invest in properties must understand not only their taxes but also how to maximize their revenue. If there are any complications with tax planning, it is recommended that they contact a professional or use an automated tax solution to streamline their tax filing procedure.

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