How can a second home reduce your tax burden?

 

Buying a second home for various reasons is one of the latest real estate trends. It is a source of pride for the second home owners to own another home with sufficient income and unsullied credit. Although a second home might serve you as a great asset, it is wiser to know the advantages and disadvantages before going for a second home. One has to know the reasons to buy a second home and should know if it is for investment purpose or for personal purpose.

Most people who own two homes are confused and fret on how to repay the home loan with the high interest rates. However, there are certain situations wherein they can reduce the tax liability if they avail the deductions on home loans in case of a second home.

 

Benefits of a second home:

Having a second home can result in the exemption on interest rate:

• If a home loan is taken for a self-occupied property, the principal amount repaid will be qualified for the deduction.
• However, if a loan is taken for a second home, the interest payment will be eligible for the deduction.
• If the second home is given for rent, the loan taken for the second home will not have any limit for the deduction for interest payment.
• In case the home is yet to be constructed, an amount of interest paid during the pre-construction period will be used for tax deduction. This rule is effective for five years from the time of construction and the complete possession.
• Having a second home can increase your net worth. After buying the second home, the home appreciates the value and increases the total net worth.
• Apart from just an investment aspect, a second home also serves as a luxury medium. This also provides you peace and solace away from your regular residence.

 

The deductions will be allowed on the income from the second home:

• If you have a second home and is lying vacant, you will still have to pay the rental value. The notional or the deemed income will be added to your taxable income.
• The home owner can deduct expenses, such as municipal or property taxes paid from the deemed income.
• Also around 30 per cent of the net annual value will also be allowed for deduction.
• In case you incur any loss after the deduction of expenses from the income that you earn from the property, you will have an option to set the current year’s loss against the income from property. In case your balance continues to be low, you can proceed with the loss for about eight years.

 

Save on tax:

Having several homes will give you an option to choose a particular home for the living. However, the income from this property will be treated as nil and exempt from tax even if the home is on rent. This home will have the limit of 1.5 lakh to be deducted as loan interest. Whereas, the interest on the loan taken for the other houses will have your income deducted as tax. It is advisable to choose the house with the highest loan as the non-exempt one in order to maximize the savings.