Tax saving Tips for Second Home Buyers | Save Taxes with Home Loan – H&R Block

Oct 23 2015,

If you are planning to buy a second home or already own a second home, there are certain tax implications you ought to know.

Investing in a second home has become quite common these days. Usually, people purchase a second home only to let it out on rent and avail long term capital gains. However, it not as easy as it seems. All property related transactions fall under the umbrella of income tax. In other words, purchasing, owning and selling a property is taxable.

So, if you are going to own or already own a second home, then, this article is meant for you.

  1. Home Loan: Taking a home loan for your second home purchase makes you eligible to avail tax benefits under section 80 C. “Considering the fact that home loans are generally cheaper than other types of loans, and there is full tax benefit on the interest payable it is beneficial to take a loan to buy your second home, says Vaibhav Sankla of H&R Block
  2. Co-Ownership: This is a good way to own your second property as it gives the privilege to avail tax benefits separately. Both co-owners (husband-wife) or (son-father) can avail the tax benefits if both of them are repaying the loan from their own funds. Ideally, the home loan should be in equal proportion.
  3. The HRA exemption: If you are planning to claim housing loan deductions and housing rent allowance (HRA) at the same time in a financial year, it can be troublesome. You have to be clear about the concept of tax before you file your income tax return. You are allowed both HRA and loan deductions only under certain conditions.

For example: You can claim both the deductions if your house is in a different city than that of residence. The department also allows you to claim HRA if you have a house in the same city as your residence, but you need to have a concrete reason. For instance, there are several people who  have their own houses in far-off suburbs and find it difficult to commute for work due to the long distance. In such cases, the concerned person can claim both the deductions at the same time.

Second condition: In case your first house is self-occupied, you can only avail a tax exemption of upto Rs 1.5 lakh on the principal amount under section 80C while for the interest component, tax exemption of upto Rs 2 lakh is permitted. . However, for your second home, there is a slight change in this rule. For your second home

You cannot file  any tax exemption on the principal amount. But, the exemption on the interest component does not have a maximum limit. You can file for tax exemption on the whole interest paid. Moreover, if your house is an under construction property, then 20 per cent of the interest paid during the pre-construction or the initial phase is also allowed for tax exemption. But, this is applicable for the first 5 years only.

When you rent-out your property: Second homes are usually put on rent by the owners. Rent coming from a property is an income but, you can also make it as a tool for your tax deductions. Vaibhav Sankla explains how.

Rent received from the property for the year is considered as income. If the property is not actually let-out for even a single day during the year then notional annual rent is considered. Often, this amount equals the amount of rent you would have reasonably expected from the property. The following deductions are made from the income:

  • Property taxes paid.
  • An ad hoc allowance for repairs and maintenance, computed at 30 per cent of (Annual Rent - Property taxes paid).
  • Interest on loan taken for purchase/construction/renovation. Note that pre-construction period interest can be claimed as deduction equally over five years starting from the year of possession.

Vaibhav Sankla further adds, that in most cases, at least for the first six-seven years the sum total of all deductions would be far higher than the amount of rental income. Thus, the loss incurred can be offset against other taxable income such as salary.

On the other hand, there are also situations when you cannot avail tax benefits for your second home:

  1. If the amount of deduction on your rental income and interest on second home loan does not exceed the rental income, you are not eligible for any tax rebate.
  2. Once you are done with the re-payment of your home loan for the second home, you cannot file for any rebate on tax.



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