Tax-free Real Estate Investments

Since the returns on real estate investments are well known, investors are frequently uncertain about the feasibility of real estate investing due to the tax on income or profits. For this reason, we provide a list of investments that allow for real estate transactions to be completed without incurring taxes.

While many people believe that real estate investments attract heavy levies, there are some transactions that are devoid of any tax liability. This article provides an account of such property investments where you can save big on taxes. Real estate investments are frequently long-term and made with the intent to generate profits. However, a lack of knowledge on the subject may cause property buyers to lose a significant amount of their income towards multiple taxes.

Income from agricultural land

As per section Section 10(1) of the Income Tax (IT) Act any income generated from agricultural land is exempted from taxes. However, one has to prove that the money earned is from agricultural land, like rent or revenue from the land or the sale of crops, to mention a few. The same rules apply to the income from farmhouses with certain conditions as per Section 2(1A) of the Act; however, landowners must pay capital gains tax if the land is acquired by the government for any kind of infrastructure development. In the case of agricultural land, the compensation received is also exempt from tax under the IT Act. 

However, to be eligible for the tax exemption on income from farmhouses, one must meet the following requirements: 

(a) the land must be used for agricultural purposes for at least two years before the date of transfer 

(b) the compensation must be received on or after April 1, 2004.

Income from the family property

Income from the Hindu Undivided Family (HUF) and ancestral property is exempt from taxation under Section 10(2) of the IT Act. According to the IT Act, a property is considered ancestral if it has been inherited by four of its immediate male ancestors.

Reverse mortgage

This concept involves the bank paying the loan borrower a fixed interest rate in either a lump sum, monthly installments, or both. If you take out a loan under the reverse mortgage scheme, the money you receive is fully tax free under Section 47(XVI) of the IT Act. If you own more than one property, the first property is tax free and the others are taxable.

REITs

As per Section 10(23FCA), income earned from Real Estate Investment Trusts (REITs) is free from all tax implications.

Value of palaces

According to Section 10(19A) of the IT Act, owners of large properties—like palaces—are considered past rulers, and the rental income they receive from renting out a section of the structure is exempt from taxation.

Income from charitable trusts and religious institutionsL

Sections 10 (23C) (IV) and 10 (23C) (V) of the IT Act exempt income from all tax implications for charitable trusts and religious institutions; however, in order to benefit from these tax exemptions, the institutions must be approved by the IT Commissioners in accordance with the aforementioned sections. The IT Act offers various provisions for investors to earn income free of taxes, but before making any decisions, it is advisable to obtain the appropriate legal counsel and knowledge on the matter.

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