Tax tips for investing in houses and apartments
This note shed light on direct and indirect tax costs that are associated with acquiring houses and apartments. The purpose of entering in to a transaction could be either to acquire an immovable property for his or her own dwelling or with the motive of reselling or leasing in order to obtain a profit or gain.
Whatever the motive for acquisition of the property, the mode of funding and the associated cost of funding entail tax consequences, hence provides an opportunity for prudent tax planning.
Selecting the Property
Unlike leasing, where there is no restriction, only condominium units above the 4th floor could be sold to foreigners where- as houses too cannot be sold to foreign purchasers due to the rules in Land (Restriction on Alienation) Act No 38 of 2014. Hence this is a distinct point one should consider in selecting an investment property if the intention is to resell.
If the intention of purchase is to resell to foreigners, then the original investment in a condominium unit should be above the 4th floor and not below the 4th floor.
Funding the acquisition
Though the income tax deduction that was available for interest on housing loans and land for construction of houses is not currently available for persons against the income from employment due to an oversight committed by the drafters in 2011, the deduction is still available for self-employed persons ( engaged in business , profession etc ). Hence for this category a housing loan or a loan for purchase of land for construction of a house / apartment is a tax efficient funding mechanism. A person in employment with other sources of income such as business income, rents and royalties etc may also avail the deduction for interest payment against such other income. A point to be borne in mind in approaching a financial institution for a facility is that the Department of Inland Revenue may deny the interest deduction associate with a personal loan extended by an institution. Therefore the facility should be a “housing loan” in order to avoid disputes with the Tax Office. A joint housing loan could be planned with instalment payments divided between two persons in any pro- portion or to be paid solely by one party depending on the availability of qualifying income to shelter the interest to be paid to the financial institution. A joint loan may be an ideal option where there are two members of the same family filing income tax Returns.
The readers should also be aware that the Department of Inland Revenue permit deduction of interest attributable refinancing of housing loans as long as the new loan is also a housing loan. The incidence of refinancing results in where the borrower of a housing loan from a particular financial institution opt to replace the existing loan with a new loan in order to obtain the advantage of a lower rate of interest offered by another financial institution.