How can I save money on taxes on a business property?

It cannot be emphasised that commercial real estate is a value proposition since it provides two distinct advantages of capital value appreciation and consistent monthly income through rentals. However, there are few notable variations between residential and commercial buildings in terms of tax benefits.

Residential properties provide tax benefits on principle repayments of up to Rs 1.5 lakh under Section 80C and interest repayments of up to Rs 2 lakh under Section 24. There are also additional tax breaks available to first-time homebuyers and buyers of affordable housing units. They additionally profit from lower GST rates on affordable house purchases. While there aren’t many tax breaks for buying commercial real estate, there are several that you may take advantage of. Let us look at these in more detail:

Taxation of commercial real estate income/rentals 

The income from your commercial real estate falls under the heading of ‘Income from House Property’ and is taxed in your hands. The rental amount you get or anticipate to receive is the yearly value, which is taxed after certain types of expenses are removed. If you do not own the commercial property and have rented it, the income is taxed under the ‘Income from Other Sources’ category. If you run your own business from the commercial property, it will appear under the heading ‘Business Income’. Many people make the typical error of reporting their rental income as Business Income because they wish to claim additional costs on the latter. However, it is best to avoid doing so because it will simply get you into problems.

You Can Take Advantage Of Tax Breaks.  

Standard deductibility 

It is applied at a flat rate of 30% as a standard deduction for repairs and other upgrades to your rented business property. It allows you to save a considerable amount of money on taxes and is applicable regardless of the amount spent on purchasing the property.

Interest deduction on loans

You can deduct the whole interest paid on your loan for purchasing or constructing commercial property, as well as the cost of rebuilding or constructing the property. In this category, the prepayment price or processing fee is also tax deductible. This, however, is only accessible from the year you acquire ownership following the completion of construction. You can also claim the total amount in five equal instalments for interest paid before to the year you gained ownership of the business property. It will begin the year after the building is completed. Using commercial real estate for your profession/business

In this instance, you cannot deduct any fictitious rental revenue. You can, however, claim depreciation as well as interest paid on your loan for purchasing the property. Actual maintenance and repair expenses can be claimed as tax deductions.  Particularly, the new taxation system limits tax deductions for commercial property loan interest. It excludes any Section 24 deduction for let-out properties. You can deduct interest and standard deductions up to the net yearly value, which is the amount you get after subtracting municipal taxes from the gross rental amount.

Things to keep in mind.

  • Deductions are only accessible in the year in which they are accrued.
  • Interest deductions are available for money borrowed from family, friends, and others.
  • There are no restrictions on deducting interest paid on loans used to purchase commercial property. However, tax deductions are not permitted throughout the building phase.
  • If you took the loan for reconstruction/repair/renewal reasons, there are no deductions for interest paid before completion.
  • For principal payments on a commercial property acquisition loan, there is no Section 80C deduction available.
  • Rental income is taxed depending on the greater of your rent in hand or the amount you expect to receive.
  • Although you may claim the whole interest as rental income after standard deduction, there is a Rs 2 lakh limit on the loss you can take against against other sources under the heading ‘Income from House Property’. In this respect, any losses might be rolled forward for an additional eight years. 

Specifically, there are post-purchase tax incentives available for commercial properties. Nevertheless, take great notice of the requirements. When you analyse the whole benefits, you will discover that owning commercial property is a good investment on all counts, including taxation.

Disclaimer: The views expressed above are for informational purposes only based on industry reports and related news stories. PropertyPistol does not guarantee the accuracy, completeness, or reliability of the information and shall not be held responsible for any action taken based on the published information.

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