Budget: These tax changes discourage investments in multiple properties

Yet it encourages first-time home buyers to buy rather than live on rent

The headline might be an attempt to grab attention. But once the Union Budget 2017-18 proposals come into effect, a lot of people might be worried. The Budget has made several clever changes in the tax laws that will discourage investments in multiple properties, yet encourage first-time home buyers to buy rather than live on rent.
 
Currently, four factors drive investments in multiple real estate properties. First, real estate is the only asset class left that still easily allows laundering of large unaccounted “black” income. Two, most investors have the ability to take loans for buying a residential property. Three, these loans are very cheap as the interest paid on these loans is fully tax deductible and the resultant loss can be set off against business income or salary income. Fourth, the capital gains on sale after three years are treated in a concessional manner and can be completely tax-free, if reinvested in another property and become fully laundered after the second round of investment.

 
The proposed changes hit at the first and the third factors. The restrictions on receiving any cash in excess of Rs 3 lakh is bound to create difficulties in paying and/or accepting large sums of cash that are typically required for these kinds of property purchases.  Another factor is the effective removal of the tax deductibility of home loan interest on multiple properties makes the home loans much more expensive. I think these two factors will have a far greater negative impact than the small positive factor of making the long-term capital gain period at two years instead of three years earlier. These kinds of properties are rarely held for decades, and hence, the other positive factor of change in indexation date will have no impact on holding of multiple properties.

 

Once the impact of these factors sinks into the market, it will have a further adverse effect on the already weak demand for high-value properties. Meanwhile, the government has already announced a slew of measures to encourage the buying of reasonably sized (650 sq ft carpet area or around 1,000 sq ft — saleable area or a decently sized 2 BHK flat) affordable homes in urban areas. Full details of the new subsidy scheme are still awaited. If newspaper reports are to be believed then households having income of up to Rs 18 lakh per year will also be eligible for a one-time subsidy of around Rs 2.20 lakh through their home loan lender. The existing subsidy scheme is well designed with no restriction on the sale of the houses bought under the scheme nor is there a limit on the value of the houses or the loan amount. The limits are only on household income and flat size. It also requires that it should be the first purchase for the household and the women of the house should be the owner or joint owner and the house should be in an approved project. It’s a scheme that is already working well for lower-income households (income up to Rs 6 lakh per annum) and there is no reason it will not work equally well for the wide swathe of middle-income households that are expected to be covered.  Developers are also given tax benefits on profits from affordable home projects. Both these things can create a massive demand for “affordable” homes. 

 
Hence, real estate is dead. Long live real estate.
 
The author is a Sebi-registered investment advisor