Tax Saving Tips for Buying and Selling a Home
Posted: Feb 07, 2017
Real estate has now become the most valuable asset that everyone needs to possess. Apart from buying a house to live in, people now see the purchase of a house as a long-term investment. But life is not always a bed of roses. With every asset comes the bunch of taxes related to it. All the operations that you do with your property are associated with taxes in every way. Be it buying a house, owning one, or selling it, you are bound to pay the numerous taxes. The property taxes amount to over 35%-45% of the value of the property. Real estate is the biggest source of acquiring tax. Paying taxes can be very troublesome as it shakes your financial stability and budget and does not allow you to enjoy the profit out of your investments. We need to find tax saving options while dealing with property to get back tax benefits of owning a home. Let us have a quick preview of the taxes imposed at every step of the transaction of your valued asset.
Taxes on Purchase of house-
The stamp duty tax is similar to the income tax and sales tax. This house purchase tax is mandatory and has to be paid during or before registration of a propertyon your name. The stamp duty on the documents makes the documents legally valid and confirms that the stamp duty tax has been paid. In a way, it plays the role of evidence that a property deal has been made. The stamp duty charges depend upon the market value or the agreement value of the property, whether the property is rural or urban, old or new, commercial or residential, has a male or female owner, is freehold or leasehold.
Value Added Tax (VAT)
The value added tax is paid for the properties under construction. But this house purchase tax has to be paid at the time of registration by the buyer of the property. VAT is not applicable for completed projects that are for resale. The transaction of the value added tax takes places at the name of the buyer.
Tax Deduction at Source (TDS)
TDS occurs in the name of the seller of the property. TDS is applicable on transfer of immovable property when the value of property is equal to or more than Rs. 50 Lakhs. It is a house purchase tax that deducts some percentage of the property’s value during the transaction. The buyer of the property is required to deduct Tax (TDS) and deposit the same with the Government.
This house purchase tax has to be paid to record the documents with the registering officer. It is paid during the signing of an agreement between the buyer and seller and is considered to be the final agreement and makes the buyer the legal owner of the property. The cost is about 1% of the contract or property value and cannot exceed more than Rs. 30,000.
Tax benefits of owning a house-
Owning a house can earn you many benefits in the tax game and help you save money. You can use many tax saving options if you possess a house as an asset. You can enable the facility of Mortgage Deduction if you own house. It deducts the mortgage interest of any loan, purchase or improvements done in the house or loans on a second house or vacation home from the payable tax. It also deducts the property tax for income tax purposes. You are in a great profit if you have put your home on the lease as the rental value that you receive from your tenant will not be considered as taxable income. The rental value will directly go into your pocket, and no tax could put its claim on the rent. You can also claim a deduction in tax if you have spent a large amount of money on the improvements in your house or making more developments and utilization of empty spaces in your house. These are the simplest ways of earning tax benefits of owning a home.
Tax benefits of buying a house-
If you are buying a house for the first time, you can easily get the tax benefits of buying a house. You may claim a deduction for the interest to be paid. The tax rules will provide you a deduction of Rs. 2 lakhs per year on the interest of your home loan. You can also apply for deduction in interest of properties that are under construction. But these deductions will be effective only after the construction of the property is complete and in your possession legally. There is also the availability of deduction in the stamp duty and registration charges for those buying a house for the first time. These deductions are allowed under section 80C. The maximum deduction of amount allowable is Rs. 1,50,000. The request for deduction is applicable only within the year of purchase of property. There is one more way to get tax benefits of buying a house. Joint owners of the property can claim the reduction from their respective income tax returns. The deduction from each of the income tax return will depend upon the share of the holder and will not exceed Rs. 1,50,000 when added together.
Tax benefits on sale of property-
The profit owned by the seller after selling his property is under the constant scrutiny of the tax department. You are imposed a tax on the sale of property. The taxes claim over 20% of the profit earned by the seller. To avoid this, the seller can invest in the Capital Gains Bond and save himself from the Capital Gains tax. If he wishes to make the Capital Gains Bond, he is required to do so within six months of selling his property. This amount is locked for 3 years, that is, it is invested for only 3 years. The minimum investment has to be Rs. 20,000 and should not go beyond Rs. 50 lakhs. The Capital Gains Tax also depends on how long the property has been in possession with the seller.
Tax saving tips-
If your house is self-occupied, it means you have no means of earning money through your asset. So you can apply for deduction of loan interest by Rs. 2 lakh every year under the section 24(b) of income tax. This scheme is also applicable to properties that are under construction but will be effective only when the owner gets possession of the house legally. This will reduce the load on your pocket and serve as a good tax saving option.
A couple purchasing a house can apply for join loans. This will make it easier for them to claim full mortgage tax deduction each and in a way, save double the amount of tax to be paid.
Another way of saving the tax amount is by claiming the Housing Rent Allowance (HRA) even if you live in your own house. You can do it by signing a rental agreement with a family member and transfer the rental amount monthly in their bank account. That family member shall show the transactions to the income tax department when required as a tax saving option.
The owner can claim a municipal tax deduction. This scheme offers a deduction of the sum equal to 30% of the amount that is spent towards the maintenance or repair of the house.
You can get tax saving benefits even while selling your property. The tax on profit gained by the seller is called Short Term Capital Gains Tax (STCG) if the seller sells his property within 3 years of purchase.
If the seller sells his property after possessing it for a long time, the tax associated with it is known as Long Term Capital Gains Tax (LTCG). The seller can save himself from the LTCG tax if he buys a new house 1 or 2 years prior to selling the old house. This will also cover up the deduction of mortgage interest and other perks that come with buying a new house and reduce the tax on the sale of property.
The Long Term Capital Gains Tax serves as a better tax saving technique than the Short Term Capital Gains tax.
Under STCG and LTCG, the seller can claim a deduction of money on the improvement of the property and the previous payments that he made while buying the house like stamp duty, legal fees and payment of brokerage.
While dealing with the buying and selling of properties, one must make sure to turn up to a tax accountant who is an expert in handling and playing the tax game. The tax accountant shall give the correct guidance and keep you updated with the new taxation laws and take over the responsibility of looking after your tax saving options and requirements to make sure you don’t suffer loss.
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