Should you buy a second home?

Ramalingam K takes you through the pros and cons of buying more than one residential property

In line with the perennial Shakespearian dilemma – “to be or not to be, ….”, a lot of us face similar predicament when we have to decide whether to buy or not to buy another residential property.

For many Indian families, investment in property is one of the most powerful and presumably gainful options. Aspirations and plans to acquire new residential properties take up a lot of time and energy during one’s lifetime. However if this decision is actually gainful or not needs some close examination.

Why more than one residential property?

Why do people decide to invest in properties?

Well, there are primarily three reasons:

• Security of investment
• Expectation of good returns
• An additional gain of income tax benefits through tax exemptions

As per the current Income Tax rules in India...

• An assessee is exempt from paying income tax for principal amount repayments up to Rs 150,000 under section 80c (clubbed with other benefits under this section).
• Interest paid on housing loans up to Rs 200,000 is also exempt from tax under section 24b.

Buying multiple houses and renting them out also fetches rental income and certain tax rebates are available to the assessee for such form of rental income subject to certain conditions.

These are broadly the reasons why people opt to invest in residential properties.

What are the tax implications for owning more than one property?

1. When a person opts to purchase more than one residential property, the tax exemption for principal repayment, under section 80c, is available only on the property, which is ‘self-occupied’.
2. For all other properties which are not self-occupied, rental income has to be declared for rented out properties and notional rental income needs to be shown for those not rented out, and tax will be applicable for all such rental incomes (both actual rent received and notional rent).
3. However, as far as tax exemption on the interest repayment part of all such properties held by the assesse is concerned, s/he is entitled to the same under section 24b.
4. While the above rules and laws may be known to many, it may not be known that more than one residential property attracts the provisions of Wealth Tax. Property other than the one that is self-occupied comes under the purview of Wealth Tax. Exemption of Wealth Tax is allowed to non-self-occupied residential properties only when each such property has been let out for rent for a minimum period of 300 days in a year.

An example can be given to illustrate this further. Mr J has three residential properties. One is self-occupied and among the other two, one is out on rent for the full year, while the other is lying vacant.

Mr J pays Rs 100,000 for the self-occupied house and Rs 150,000 each for the other two as principal repayment. The interest payment is Rs 75,000 for the self-occupied house and Rs 125,000 each for the other two properties.

As per Income Tax rules, Mr J is entitled to tax exemption for principal (Rs 100,000) on account of self-occupied house, the entire interest (Rs 325,000) on the three properties and can claim wealth tax exemption for only one among the other two (the one which is rented out for the full year).

What are the disadvantages of holding more than one residential property?

Before venturing out to buy more than one residential property it is necessary to keep the following points in mind:

• By purchasing multiple housing properties, one has the obligation to repay such loans on time and this entails substantial outgo of funds, which in turn leaves limited or nil funds for investing elsewhere.
• Inflexible repayment schedules can seriously constrain any mid-term investment opportunity elsewhere, due to fund scarcity.
• The annual yield form property investments are pegged at 11-12 per cent, which is considered below par when compared to investments in equities. This 11-12 per cent includes the property value appreciation. If we take into account only the rental income, it will be around 3 per cent only.
• Return on properties are often expected to be spectacular, it is however actually not so all the time. If, by chance, any natural calamity occurs in or around the area where the property is held, it is likely that the same will yield negative returns in such a situation.
• Tax and property laws are subjected to frequent changes and the maximum tax benefits derived out of property is when one single residential property is held.

Whether to go or not to go for more than one residential property?

An ideal situation would be one where only one residential property is owned. However, there are many familial considerations, which often have to be taken into consideration and in such situations it becomes necessary to purchase more than one residential property.

If multiple residential properties need to be purchased, then it is advisable to ensure that such properties are let out for rent. The rental income can then be used for making other investments. This allows the investor to have a diversified investment portfolio.

Another option, which may be considered, is going for investment in one residential property and multiple commercial properties. This will allow a host of tax benefits that are available for investments in commercial properties.

On a parting note it can be said that it is always useful to understand all the implication of tax and property laws before arriving at a decision about investing in multiple residential properties.

Photograph: See-ming Lee/Wikimedia Commons

The author is Ramalingam K, CFP CM is the Chief Financial Planner atholisticinvestment, a leading financial planning and wealth management company