Real estate continues to be one of the most popular investment strategies around the world. And the reasons are the growing prices as they are not going to manufacture any more land. For those who aim to protect and grow their wealth, it is the most reliable and trusted way. Combined with the enticement of generating cash flow, real estate investment also opens a treasure chest of tax advantages that renting does not.
As one of the most preferred investing options, real estate offers great tax benefits. For the investors, ownership of a real estate property can produce substantial tax savings, including tax sheltering. And since many of us would want to know how to save tax by investing in property, I’ve compiled a list of things that can help you save a lot of income tax.
Investing in Second Property
Most of us would want to own a property that is right from the first seller in order to enjoy being the first owner of the property. But, did you know that a property is never second hand and buying second property can save a lot of tax for you? Tax experts claim that investing in second property is a viable option from the point of tax exemption.
But, it is important that you make sure that the property must not be self-occupation, but for rental purposes only. Also, there are options to invest in commercial property for the purpose of renting it out. Tax saving on investment property you get with the second property is that you get the exception for interest on the loan without an upper limit. However, the interest paid on the second home loan is exempt from taxable income.
And one great thing about it is that you can buy in a group and all the people in the group will be eligible for exemption on the interest element individually. You are also exempted from the taxation up to 20 per cent for the interest paid during the period of construction of the second home.
Tax Exemption on Home Loan
This comes as a boon for the people who are interested to own a property in the fast-growing real estate industry. If it is your first home, both, repayment of principal amount and interest payment are eligible for tax benefits. This is one of the greatest and well-known tax benefits of real estate investing. With the repayment of principal amount, you are eligible to claim deduction up to a particular amount.
Exemption from Long-Term Gains
Before understanding how to save tax by investing in property, it is important that you know what a capital gain is. It is the term used for profits obtained on disposing of capital assets such as stocks, bonds or real estate. If you have a property that is held for 3 years attracts short-term capital gain, when sold at a profit. When you sell the property, the gain is added to your income and taxed as per the income tax bracket you fall under.
On the other hands, real estate property also offers tax exemption for long-term capital gains. If the property is held for more than 3 years, the taxpayer is liable to pay long-term capital gain (LTCG). While the LTCGs are usually large, there are provisions available to reduce the tax burden. You may choose to reinvest capital gains to obtain the exemption by reinvesting in other capital assets within a specific period. Since the global real estate industry is booming, it is a smart choice to reinvest the gains in an apartment or a piece of residential plot.
Investing in REITs
Investing in the Real Estate Investment Trusts (REITs) is the best way of Tax saving on investment property. While it may not be available in many countries, it offers great saving for the people who want to save their income tax with real estate investment. An investor with a lower budget can make property via REITs. The REITs have seen success on a global scale in channelizing huge savings into properties as it proves to be great to save on taxes.
For the real estate investors, it is important to keep in mind that there are countless options available to enjoy tax benefits of real estate investing at your disposal. The only problem is that not many know what methods are available and how to take advantage of it. For the investors aiming for long-term wealth, real estate tax benefits are extremely important and taking advantage of the tax breaks will ensure that you stay on the path to financial freedom.