Tax issues with owning more than one property

This article idea triggered from a simple query — how many properties a person can own? On the face of it, the answer is even simpler — as many as you want. There are no restrictions on the number of properties you can own either under the general laws or under the income tax laws.

Here arises another question - How many properties for which you can take a home loan? There are also no restrictions in this respect either under Income Tax Act or regulations of the Reserve Bank of India (RBI). However, there are some tax implications under the provisions of income tax laws and wealth tax laws for owning more than one house.

In this article I would like to cover the subject of ownership of more than one property and its implications.

Deduction in respect of repayment of principal of home loan Presently, the income tax laws allow you an overall deduction of up to `1 lakh for repayment of housing loan. This amount also covers the amount you paid on registration and stamp duty for any residential property. As per my understanding of the provisions, there are no restrictions in respect of the number of properties for which this deduction can be claimed. Please note that this deduction is available together with the other items of expense and investments eligible for deduction like life insurance premium, school fees for two children, contribution towards PPF, Provident Fund, NSC, etc. It is important to know that you can claim this deduction only if the loan has been taken from banks, housing finance companies and other specified entities. This deduction can only be claimed after you have taken possession of the property. You are not eligible to claim any tax benefits, even if you have started repaying the principal amount of the loan, unless the construction is complete.

Repayments of loan taken by you from your friends and relatives are not eligible for this deduction.

The deduction in respect of repayment of housing loan will not be available under the proposed Direct Taxes Code (DTC). So, for all practical purposes, this deduction on principal repayments is available for only one more year if the DTC gets implemented as per schedule.

Deduction for interest payment
You can claim deduction in respect of interest on loans taken for the purpose of purchase or construction of any property. This deduction is also available in respect of interest on loans taken for the purpose of reconstruction, repairs and renovation. The interest payment can be claimed for any house property and not necessarily residential house property. However, if you own a house property which is occupied by you, then you can claim a deduction for interest up to `1.5 lakh. In case you have more than one house property, the tax treatment is different. If you own more than one house property and all are occupied by you, then you have to exercise an option to choose one of the property as self-occupied and the other properties will be treated as let-out, for which a notional rental income is required to be offered for taxation.

However, in case the other property or properties are let out, the actual rent received is taxable. Also, there is a difference with regard to tax treatment for interest paid on loan taken for such properties. In respect of the properties, which are either let out or deemed to have been let out, you can claim the whole of interest paid as deduction against the notional rent or actual rent received. Under the proposed DTC, the interest on house property will be allowable only if the other property is let out. That means you will not be able to claim any interest paid in respect of other properties which are not actually let out. However, the deduction up to `1.5 lakh will continue to be available in respect of one self-occupied house property.

In this case, even if you have borrowed money for the house from your friends or relatives, you will be able to claim tax benefits on such loans.

Exemption from capital gains
The present income tax laws allow you an exemption from long-term capital gains if you make investments in residential house property. The exemption is available in respect of sale of two types of assets. The first class includes long-term capital gains arising on sale of residential house properties. There is no restriction as to the number of residential houses you can own for claiming this exemption. The second class includes assets other than residential house properties. You are not eligible to claim the exemption in respect of long-term capital gains on such assets in case you own more than one house in addition to the house which is being purchased for claiming this exemption.

Provision under Wealth Tax Act
A few of you only would be aware of the existence of wealth tax as only a few people are covered under the ambit of wealth tax due to exclusion of various financial assets and a high minimum slab limit. However, as far as tax on value of house property is concerned, the Wealth Tax Act provides for exemption of one house from levy of tax. There is no limit on the value up to which your one house enjoys the wealth tax exemption. The value of the house can be `1 lakh or `100 crore. However, the exemption is available in respect of one house property in case you own more than one — you have an option to choose one of the houses as exempt and offer the value of the other house for wealth tax. All the commercial properties are exempt from wealth tax. In case you own more than one house and the others were let out during the previous year for a minimum period of 300 days, it also is exempt from wealth tax.

However, in case the value of the second house together with other assets is not more than Rs30 lakh, you still do not have to pay any wealth tax as the total value of the assets does not exceed the basic exemption limit.

So, each member of your family can own a house in his/her independent capacity and thus the tax benefits of owning a single house can be retained by each of the adult members in the family.