Friday, February 4, 2011

Resell Property

Resell Property in 3 years... and lose half of your gains

The profit made from the sale of a house is never a simple calculation involving the subtraction of purchase price from the sale price.A number of income-tax caveats kick in. If you buy an apartment for Rs 50 lakh and sell it two years later for Rs 1 crore, your profit from sale will not be Rs 50 lakh. It will be much lesser.

Here is how the maths works:
If you sell within three years of buying: The first thing is to take into account is tax liability. If you sell a flat within 36 months of buying it, the profit is added to your income for that year, and taxed accordingly. If you fall in the highest income tax bracket, the tax rate will be 30.9%, which comes to Rs 15.45 lakh.

If you have taken a home loan: You will also have to take into account what you actually paid for the property in the first place. For instance, if you taken a home loan of Rs 40 lakh for buying the apartment you would have been paying an interest of 9.5% for the past 24 months. Your equated monthly installments (EMI) would work out to Rs 37,285.

Now under Section 80C of the Income Tax Act, the principal of the home loan can be claimed as a tax deduction. But if the property is sold within five years of buying, the tax deductions are reversed.

During the early years of a loan tenure, a major part of the repayment is tagged under "interest repayment". In your case, of the nearly Rs 9 lakh repaid over two years, only Rs 1.78 lakh is the principal repayment. The principal component will be added to your income for the current year and taxed at 30.9%. This means another Rs 55,000 skimmed for your profit.

Also, for two years you paid interest of Rs 7.17 lakh on the home loan. This will be deducted from your capital gain, which comes down to Rs 26.83 lakh (Rs 34 lakh - Rs 7.17 lakh).

Of your remaining home loan principal, Rs 38.22 lakh (Rs 40 lakh - Rs 1.78 lakh repaid as principal), the bank will levy a prepayment charge of 2.25%, which works out to around Rs 86,000.

After these deductions, the actual profit on the sale is only Rs 25.97 lakh, nearly half of what you had dreamt of. Most investors look at short-term real estate investments the same way and get carried away by stories of friends or colleagues who made lakhs within a year. However, before you are inspired to do the same, do your calculations, or better still, stick to your investment for the long term.

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