How To Save Money On Commercial Property Taxes?

Commercial Property Taxes : Buyers are increasingly interested in adding commercial real estate to their portfolios because the asset class is in high demand and has excellent capital appreciation potential. If you are one of them and are looking for ways to save money on the purchase of an asset, you should read this article.

It cannot be overstated that commercial real estate is a value proposition because it provides the dual benefits of capital value appreciation and consistent monthly income through rentals. However, there are few notable differences between residential and commercial properties in terms of tax benefits.

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Residential properties provide tax benefits on principal 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 also benefit from lower GST rates on affordable home purchases.

While there aren’t many tax breaks for buying commercial real estate, there are some that you can 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 category of ‘Income from House Property’ and is taxable in your hands. The rental amount you receive or expect to receive is the annual value, which is taxable after certain types of expenses are deducted. If you do not own the commercial property and have sublet it, the income is taxable as ‘Income from Other Sources.’

If you run your own business out of your commercial property. It will be classified as ‘Business Income.’ Many people make the common mistake of reporting their rental income as Business Income. Because they want to claim other expenses on the latter. However, it is best to avoid doing so because it will only get you into trouble.


Commercial Property Taxes: You can take advantage of deductions.

Standard deduction: It is applicable at a flat rate of 30% as a standard deduction for repairs and other renovations to your rented commercial property. It allows you to save a reasonable amount of money on taxes and is applicable regardless of the amount spent on purchasing the property.


Commercial Property Taxes: Deduction for loan interest:

You can deduct the total interest paid on your loan for purchasing or constructing commercial property. As well as for reconstructing or constructing the property. In this category, the prepayment charge or processing fee is also tax deductible. This, however, is only available from the year you take possession following the completion of construction. You can also claim the total amount in five equal instalments for interest paid prior to the year you took possession of the commercial property. It will begin the year after the construction is completed.

You cannot claim any notional rental income-based deductions if you use the commercial property for your profession or business. 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.

Notably, 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 annual value. Which is the amount you get after deducting municipal taxes from the gross rental amount.


Commercial Property Taxes: Remember the following:

  • Deductions are only available in the year in which they are accrued.
  • Interest deductions are available for money borrowed from relatives, friends, and others.
  • There are no restrictions on deducting interest paid on loans used to purchase commercial property. However, tax deductions are not permitted during the construction period.
  • If you took the loan for reconstruction/repair/renewal purposes, there are no deductions for interest paid before completion.
  • For principal repayment on a commercial property purchase loan, there is no Section 80C deduction available.
  • Rental income is taxed based on the greater of your rent in hand or the amount you expect to receive.
  • While you can claim the entire interest as rental income after standard deduction. There is a Rs 2 lakh limit on the loss you can set off against other incomes under the heading ‘Income from House Property’. In this regard, any losses can be carried forward for an additional eight years.

Specifically, there are post-purchase tax benefits available for commercial properties. However, take careful note of the conditions. When you consider the total benefits. You will discover that purchasing commercial property is a good investment on all counts, including taxation.



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