What could be better than money for nothing? That is the hopeful promise of passive income. Passive income is money earned with little or no regular effort. Commercial property fractional ownership is a new source of passive income. However, if anything permits you to generate income, it is subject to taxation. The IT laws for commercial property fractional ownership differ from that for residential property.
Because of popular reality TV shows, many people believe that real estate investment is buying houses, fixing them up, and then selling them for a profit. Others believe that generating passive income implies purchasing buildings and renting them to renters every year.
Both of these are legitimate methods of investing in real estate. They are, however, not the only options. There are various passive real estate investments, such as fractional ownership, that do not need as much effort or expertise.
What is passive income real estate?
Passive income real estate gets widely recognized as the best method to generate additional earnings, achieve retirement security, and finally construct a path to financial freedom.
Passive real estate investing is when you give someone your money and they do all of the work for you. A real estate investment trust (REIT) or a real estate partnership where you are not an active participant are suitable examples. The main thing is that a passive investment involves little effort from you.
Passive income real estate investing is a way to profit from real estate without actively engaging in it. The degree of action and engagement varies with the quantity of investment. Rental properties and investment portfolio earnings are examples of real estate revenue. Passive income real estate streams should ideally generate rental income, dividends, and interest while growing without your participation over time.
Commercial properties outperform rental properties in terms of returns. "How will it be a passive income investment if I have to run around and handle the estate, not to mention the double headaches?" you may wonder. In fractional ownership, you do not need to manage the property. Someone else will operate it for you.
Fractional Ownership of commercial real estate what?
That glamorous commercial property next to your flat is costly to invest in and will cost you crores. It is pricey and gets measured in crores. However, just though you lack crores does not exclude you from investing in commercial property. Even if you just have lakhs, you can go ahead. That is possible with fractional ownership. Assetmonk, for example, enables a person to invest in a quality office property for as little as Rs. 25 lakhs.
Fractional ownership is an excellent option to invest in real estate without acquiring property and earning passive income. It allows investors to own a piece of commercial property and enjoy all of the perks of property ownership without the initial investment or present issues. It is better suitable for high-end commercial real estate with a high-risk profile. It is also favorable for a single investor who may be unable to finance the entire property. Investors can purchase a stake in high-end commercial property and generate a consistent rental income while building long-term wealth. It is well-liked by institutional investors. It is also emerging as a viable investment option for intelligent middle-class and individual investors.
Tax Implications on Passive Income From Fractional Ownership Of Commercial Real Estate
The IT laws for commercial property fractional ownership differ from those for residential property. Commercial property fractional ownership is developing as a stable source of wealth growth. However, if anything permits you to generate income, it is subject to taxation.
The tax laws for commercial property fractional ownership differ from regular residential property. The most significant concern property owners have is the high tax log after selling their homes. To circumvent this, most sellers would invest in alternative properties of equal or greater worth. It eliminates the tax burden and allows them to claim advantages under sections 54F or 34 of the IT Act of 1961.
But, fractional ownership of commercial property gets not taxed in the same way other properties are. When it comes to fractional ownership, it just conveys a share or a portion of the whole property and no actual transfer occurs. As a result, the seller may need to pay the applicable taxes.
When fractional ownership shares get sold, the shares of SPV or the holding company get transferred. The buyer can claim advantages under section 54F via investing the whole selling value in residential properties. But, several requirements should get recognized before proceeding with the transaction.
Investors get equity holdings and securities of SPV or an investment vehicle that owns and operates the underlying property under the fractional ownership model.
In case you are the lone buyer of an estate, you receive ownership in exchange for your capital investment. You will receive entire ownership of the estate in this transaction. Your name will appear on the property paper. But, if you invest through fractional ownership investment, you obtain a piece of the property. You also get a chunk of the transaction gets done in the name of a 3rd party. This organization is known as SPV or Special Purpose Vehicle.
A subsidiary founded by a parent firm to separate financial risk is known as an SPV. Buying properties via fractional ownership makes you a stakeholder rather than a lone owner.
No tax deduction
The benefit of tax-writing off is not transferable to the asset class of fractional ownership.
Fractional ownership is not handled in the same way as other kinds of property. Even if you have sold your commercial properties, you cannot purchase residential properties or capital gains bonds issued by a certain institution. But, you can claim an exemption under sections 54, 54F, and 54EC.
It is feasible if the earnings of the sale get used to purchasing residential properties. You cannot deduct profits if you acquire one business property with the proceed of the sale of other commercial properties. Buying fractional ownership of business property has the same financial impact.
Reinvesting capital gains is possible in residential properties or real estate. But, it is not so in commercial properties. In CRE, there are no tax deductions.
CAclubindia
