Selling an under-construction property?

Remember that the property for which you have paid an initial advance is a capital asset subject to capital gains tax.

The continuous rise and fall in property prices over the past few years, particularly in large cities such as Delhi and Mumbai, has kept the property market buoyant. Changing sentiments in the real estate market have placed at least one category of home-buyers in a very fortunate situation—those who booked yet-to-be-constructed properties a few years ago. These buyers have seen the prices of such properties go up as compared to the price at which they were booked. Many property buyers are also often tempted to sell these assets while they are still under construction.

A critical point that most property buyers miss out on is the tax implication on sale of properties that are still under construction. A buyer generally books a property with a builder much before construction is completed. In many states, property registration takes place only when the possession is passed on to the buyer after construction is completed. What most buyers do not know is the fact that a contractual right on an under-construction property is also a capital asset under tax regulation even though the property is yet to be registered in the name of the buyer. So, is the sale of rights on an under-construction property before actually getting possession of such property subject to capital gains tax? The term ‘transfer’ as defined under the Income Tax Act, 1961, (IT Act) is not limited to sale, exchange or relinquishment of a capital asset, but also includes extinguishment of any right in a capital asset which takes place when the owner abandons his rights on the property. Further, ‘capital asset’ is also defined widely to include any ‘property’ and hence rights in an under-construction property can also be regarded as ‘capital asset’. In other words, a fully constructed property which is already registered in your name is no doubt a capital asset. But at the same time, a right to receive possession of an under-construction property booked by the buyer and on which initial advance has been paid is also a capital asset subject to capital gains taxation.

How can the date of acquisition and the nature of capital gain – long-term or short-term be determined?

Yet another issue that arises in the context of transfer of rights in the property under construction is the date of acquisition of the right for the purpose of classifying the capital gain as short-term or long-term capital gain.

The period of holding an asset determines whether the gain is long-term or short-term. The gain arising from transfer of the capital asset held for more than 36 months is a long-term capital gain; otherwise it is a short-term capital gain. For under-construction properties, one view in respect of date of acquisition is that the date of booking of property and/or the date of payment of initial advance would be regarded as the date of acquisition. For example,if you have booked a property in 2010, which is still under construction and you would like to transfer the right on such property in 2014, any gain on such transaction will be considered a long-term capital gain. The other view could be that the right would come into existence only when the property is registered in the name of the buyer and the builder passes on possession of the property to the intended buyer. Indian courts have resorted to both these views at different points in time.

While it is possible to consider the date of booking of property and/or the date of payment of initial advance as date of acquisition, this view could vary depending on facts of each case and the documents executed/ provided by the builder to the intended buyers. In case you are planning to sell your under-construction property in the near future, it would be worth evaluating the tax advantages of selling the right on such property before getting it registered in your name.

Can you plan your taxes by reinvesting this gain in some other property? Long-term capital gains arising from sale of under construction property can be exempt if the sale proceeds are reinvested in specified assets. For example, purchase of residential house property within two years of sale of under construction property or construction of residential house property within three years of sale of under-construction property would make an individual eligible for exemption subject to fulfillment of other conditions.

The tax scenario in respect of under-construction properties is significantly uncertain. Real estate investors should, therefore, tread with caution while investing money in under construction properties. It is important that you explore all planning opportunities and take an informed decision before finalizing the transaction as that may help to reduce your tax burden.

Source: PropertyatNeoDevelopers.Wordpress.Com

Office Space - Invest profitably in office

What are the pros and cons of investing in commercial property and how do you choose the right property.

The key advantage of investing in commercial property (office space) vis-a-vis residential property is that you can earn higher rental yields.

 While residential property can give you a return of 2-4%, commercial property can give a return as high as 6-9%.

Another advantage of investing in commercial property is that you can earn rental returns from it initially and use it for your own needs some time in the future.

For instance, you may be in a job at now but may want to start your own business or consultancy at a certain stage in the future-the office space will come in handy then.

The disadvantage of investing in commercial property is that capital appreciation in this asset class does not match that in residential property. Capital appreciation in residential property tends to be driven by both end-user and investor (or speculator) demand.

In the case of commercial property, however, the capital value tends to be more a multiple of the rental value. And rental value cannot keep rising very fast for too long; otherwise, it would make the cost of doing business prohibitive.

When you invest in commercial property, know that returns could be affected by the economic cycle.When the economy witnesses a downturn, fewer new businesses are created. This affects the demand for commercial space, and hence the pace of increase in rental rates.

How to select the Right Property:

 
As in the case of all real estate projects, location is the most important criterion even in the case of commercial property.

Try to pick an area where economic activity is likely to grow at a robust pace in the future. It should also be a locality where a massive amount of new supply will not enter the market in the next few years. If that happens, your returns could be adversely affected. The building that you invest in should have a good front and should be easily accessible from the main road. If visitors have to pass through narrow lanes to reach your building, tenants may not find it attractive. It should also be close to a main highway and should have a bus stop nearby. A Metro line would, of course, be the icing on the cake.

If you plan to buy in a project that is still under development, you should examine the builder's previous projects. This will give you an idea of the level of quality you can expect from him.

How well the builder maintains his projects after handing over possession is another issue that you must pay close attention to. If the building is kept by a maintenance agency, check whether the it is doing a competent job.

“How well a building is maintained after you are given possession plays a crucial role in its ability to attract tenants,“ says Sanjay Sharma, MD of Qubrex, a Gurgaon based real estate consultancy.

When you are in vesting in a commercial property under construction, make sure that all the approvals are in place and the developer has all the papers to prove that the land on which he is developing the property is owned by him.

Shared Property:

In commercial buildings, you also have the option of becoming a part owner of a large plate area. The area you own may not be demarcated and walled off on all four sides.

The advantage of investing in a shared property is that the ticket size is low. The disadvantage is that disputes may arise among the owners. For instance, some of the owners may be ready to lease the property at a certain rate, while others may opt to wait until another tenant who is ready to pay a higher rent is found. Making unilateral decisions is impossible in such a property.

Exiting such an investment can also be more complicated than in the case of a standalone property. The biggest disadvantage of a shared property is that since the areas are not properly demarcated, legal issues could arise over ownership rights.

Armed with this fundamental knowledge, you can now make profitable investments in commercial property.

Source: PropertyatNeoDevelopers.Wordpress.Com