Rahul is a young businessman, who had lot of surplus cash. He wanted to invest this cash. His friend advised him to invest in property. As property prices were going up, he invested in a property worth Rs 50 lakh (Rs 5 million).
As the property prices escalated further, the value of his property went up. His friend advised him to sell-off his property, which was now priced at Rs 75 lakh (Rs 7.5 million) in just 2 years. Accordingly Rahul sold off his property.
But he was shocked to find out that the actual profit he got was much lesser than Rs 25 lakh (Rs 2.5 million) that he had expected. What happened? What went wrong? Here is why Rahul lost his money.
Capital gains
Income tax department considers property to be an asset. Any profit you earn by selling it, attracts a capital gains tax. If it is held for less than 3 years, it attracts a short term capital gains tax, which is charged at higher rate than long term capital gains tax, which is applicable after 3 years. Since Rahul sold off his property before 3 years, he ended up paying short term capital gains tax, thus eroding his profit.
Duties
When Rahul bought the flat, the amount he paid was much higher than Rs 50 lakh. This is because he had to pay various duties like stamp duty, registration fees, brokerage. As a result, his cost price went up. Now since he held the property for a short time, his profit did not climb high enough to cover these expenses. Moreover, if he had to pay brokerage to sell the property, his profit would be reduced further.
Wealth tax
Since this property was Rahul's second one, he had to pay wealth tax, which was 1% of the total wealth over Rs 15 lakhs. As Rahul possessed gold, car and other assets, his wealth easily exceeded Rs 15 lakh (Rs 1.5 million). Ultimately he was forced to pay wealth tax, thus eroding the value of his investment.
Opportunity cost
During the time Rahul remained invested in his property, the stock markets also reached new highs. Now the returns from stock market are much higher than the returns from property. Besides the holding period for stocks is just 1 year after which long term capital gains tax sets in. Rahul lost this opportunity to earn high returns from stocks.
But he is not alone. Many celebrities like Shah Rukh Khan, David Beckham and others had heavily invested in properties in Dubai. But with the recent crash of Dubai World, not only will they not recover their money but they have lost the opportunity to invest in stocks that have been showing upward movement.
Should invest in property or not?
Of course yes. However it should be done only after thoroughly understanding the costs involved in buying a property. You need to remember the costs involved in buying and maintaining a property is much higher than any other asset. Besides you should also diversify your portfolio across other asset classes.
You have to understand the costs affecting the returns from the property, which Rahul did not take time to understand. Moreover property is not a very liquid investment, so you should have the capacity to hold on to it till you get a right buyer. If you can manage to follow these recommendations, you can get the best returns from your property.
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