The first thing the term real estate brings to one’s mind is a house, or more correctly, home. It is not that a house is the only form of fixed asset investment, but human beings are more connected with the idea of home from their memories and experiences with their parents, siblings, relatives and their neighborhood from their childhood days. Real estate is an asset with limited liquidity in comparison to other asset classes. It involves the purchase, ownership, management, rental and/or sales of property for profit. One can hold real estate tangibly which enhances its reliability and return on investment.
Rental income is the most common method by which one can earn from a property. Some individuals are more inclined to trade in properties to make gains and create wealth. They identify and buy real estate, be it land or a constructed property, negotiate for a lower price or find an undervalued one, get it repair if need be and sell it for a profit when they get the right price. While owning a house has been every person’s dream from time immemorial, as an investment, real estate has become popular as an investment only in the last century.
Residential real estate consists of housing for individuals, families or groups of people. It includes both new construction and resale of independent homes, apartments, town houses, retirement homes, town houses, vacation homes, and residential plots etc. This is the most common type of real estate investment.
Commercial real estate property is used exclusively for business related purposes. It is leased to tenants to conduct income generating activities. It includes retailers of all kinds, office spaces, hotels & resorts, restaurants, medical centers, and shopping malls etc. Commercial real estate provides better rental income and capital appreciation compared to residential real estate, but it requires more sophistication and large capital.
Agricultural real estate is a piece of land permitted to perform agricultural activities either for livestock production or crop production. To supplement the crop demand with increased number of people and limited land supply, agriculture land is considered as the most important aspect of agriculture production.
Benefits of Real Estate Investment
- Benefits of Real Estate Investment
- Self-decision making
- Value appreciation
- Stable income
- Tax benefits
- Higher capital requirement
- Huge transaction cost
- High maintenance and management
- Less liquid in nature
- Financial and legal liability
- Dealing with market inefficiencies
- No fixed maturit
- Income received from residential or commercial asset on let-out property is treated as income from other sources and the same is taxed as per marginal tax slab.
- Income received from agricultural property with farming is tax-free.
- Capital gains received from the sale of residential or commercial or urban agriculture property are treated as either long term or short term based on the period of holding. If the property is sold in less than 2 years from the date of purchase gains/loss are treated as short term capital gains and the gains are taxed as per marginal slab. If the property is sold after 2 years from the date of purchase gains/loss would be treated as long term capital gains and the gains are taxed @20% with indexation.
- Rural agricultural property is exempted from capital gains tax as the rural agriculture property is not treated as a capital asset.