The trend of several business owners, contractors, and independent professionals investing in properties is growing in India. A company is a legal entity, just like an individual. As per the law, companies operating in specific sectors are allowed to buy residential properties. This is a beneficial option as it paves the way for new avenues and a chance to earn rental income. However, one should consider several financial and legal factors before investing in a property through a company.
Can a business buy a residential property?
A business can purchase a residential property in India. However, there are some legal considerations to be noted. Several companies in India consider investing in residential properties a favourable idea, whether it is for providing housing for their employees or generating rental income. Moreover, the investment leads to substantial savings on mortgage interest, reducing the tax burden while allowing the flexibility to manage taxes.
Foreign companies must seek specific permissions or comply with certain regulations before buying any property in India, according to the Foreign Exchange Management Act (FEMA), 1999.
Legal factors to consider for a business to buy a residential property
Residential property is constructed for a place of living, not for commercial or industrial purposes. Thus, there are various factors to consider before investing in a residential property through a business.
- Restrictions on ownership: In some regions, there may be restrictions on the purchase of a residential property through a business. These include zoning regulations or laws that do not permit non-resident ownership in an area.
- Legal compliance: Companies are required to adhere to the laws and regulations pertaining to property transactions, such as real estate contracts, disclosure requirements, and anti-discrimination laws.
- Corporate structure: The legal structure of a business, such as a corporation, partnership, sole proprietorship, etc., will impact the way it can purchase and own a property.
- Loans: The interest rates and terms and conditions of loans may differ for companies opting for loans to finance their property purchase.
Financial factors involved for a business to buy a residential property
- Taxation: Before buying a residential property through a business, it is necessary to consider the tax implications. One must consider factors, such as property taxes, depreciation, mortgage interest deductions, and applicable capital gains taxes upon sale. For taxation purposes, the income tax for a company buying a property is counted under Corporate Tax.
- Financing options: It is also necessary to assess the various options, such as mortgages, loans, or utilising company funds to finance the property purchase. Interest rates, loan terms, and repayment schedules are some of the factors to consider when making an informed decision.
- Operational expenses: Before buying a residential property, a business must estimate the budget by considering expenses, such as property taxes, insurance, maintenance, repairs, utilities, and property management fees. This will ensure the investment is profitable in long run.
Reasons to buy residential properties through a business
- Some companies invest in residential properties to provide housing facilities to their employees.
- A company may want to diversify its assets by investing in residential real estate.
- Investment in residential properties is beneficial for companies as it helps save on mortgage interest, and low tax rates.
Buying residential properties through a business: Advantages and disadvantages
| Advantages | Disadvantages |
| Tax deduction on mortgage interest, property taxes, and depreciation. | In case profits are distributed as dividends to shareholders, it can result in double taxation |
| Increases company’s credibility, particularly if the residential properties are used for employee housing or executive accommodations | Increased administrative responsibilities and compliance requirements for managing corporate-owned properties |
| Provides companies avenues to diversify their investment portfolio | Increased legal and regulatory requirements than individual ownership |
| Limited liability for the company’s owners and shareholders | Corporate mortgages may have stricter lending criteria and higher interest rates |
| Distinction of personal and business assets, minimising personal risk in case of lawsuits or bankruptcy | Owing to corporate ownership, lesser flexibility in the personal use of the property |
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Type of businesses can buy a residential property in India
Not all companies may be allowed to invest in a residential property. The type of business that can purchase a residential property depends on the nature of the business, objectives of the company, industry, and investment strategy and local regulations.
The types of businesses that can buy a residential property in India include:
- Real estate investment companies: Companies, including Real Estate Investment Trust (REITs), acquire, own, and manage residential properties for investment purposes.
- Real estate development firms: Companies engaged in real estate development are permitted to acquire residential properties for redevelopment, renovation, or new construction projects.
- Construction companies: Certain construction businesses invest in residential properties as part of their development projects or as investments to renovate and resell the properties for profits.
- Corporate entities: Corporations, partnerships, and limited liability companies (LLCs) are also allowed to purchase residential properties for employee housing, executive accommodations, or to gain rental income.
- Property management companies: These companies invest in residential properties to expand their portfolio and create additional revenue sources.
- Hospitality businesses: Hospitality businesses, including hotels and resorts, invest in residential properties to provide accommodations, such as vacation rentals or extended-stay accommodations for guests.
- Retail businesses: Retail businesses can purchase residential properties for the purpose of using these properties for live-work spaces or employee housing.
Tax laws for businesses owning residential properties in India
- Property tax: Companies owning residential properties are required to pay property tax to the local municipal authority. The tax amount will depend on the property’s assessed value.
- Income tax: Rental income from residential property is taxable, depending on the net income.
- Capital gains tax: The profits gained from the sale of a residential property are subject to capital gains tax based on the holding period.
- Goods and Services Tax (GST): GST is applicable on the rental income in cases, such as renting out residential properties for commercial use or as part of a larger business operation. Residential properties used solely for residential purposes are typically exempted from GST.
Should you purchase a residential property through a company?
For individuals, it is necessary to assess their current situation and compare the pros and cons and the costs involved in going ahead with the investment. One must also note that an individual owning a residential property in his name must pay a higher tax than the tax payable if the property was purchased through a company, which falls under the Corporate Tax.
Housing.com News Viewpoint
Companies looking to invest in residential properties must consider the legal and financial implications of the investment and other operational factors. Buying a residential property offers various benefits, such as tax deductions on mortgage interest, avenues for additional income, etc. Through financial planning and guidance from experts, a company can consider expanding its property portfolio.
FAQs
Can a private limited company buy properties?
A company can purchase a property by considering legal and financial factors, including local regulations.
Can a company own a property in its name?
A company is considered a legal entity and allowed to own a property in its name.
Can a residential property be used for business purposes?
A residential property may be used for business purposes with legal permission.
What are the benefits of buying a property under a company’s name?
Purchasing a residential property under a company's name provides tax benefits on mortgage interest, property taxes, etc. It provides an additional revenue source and enables the expansion of the property portfolio.
Which companies can buy residential properties?
Real estate investment companies, real estate development firms, construction companies, corporate entities, property management companies, hospitality businesses, and retail businesses are allowed to purchase a residential real estate.
| Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com |
