“House building” is an economic activity that is hugely encouraged in most tax legislations.  Governments want people to build houses and promote the development of localities and contribute to overall economic growth.  So, people who invest in house property are given a number of incentives to do so.  They are given a number of tax breaks that are not available to persons who earn income under other heads of income as defined in the tax legislation of the country.

However, it should be noted that income from every type of house property is not treated on the same footing in all countries, for a variety of reasons. Depending on the scope of encouragement to be given to house building activity, the  income tax benefits available on the  first property owned by a person may be different from the income tax benefits available on  the second property owned by the same person.

It follows that income tax benefits available on properties owned by the individual in countries other than the country of residence, may also be different. The tax on income from such properties may be computed with reference to any tax treaties that may have been entered into by the parent country with the country in which the property yeilding income is located.

Having said this, let us go on to examine what is commonly understood as income from house property.

Income from House Property, also referred to as rental income, is any payment you receive for the use or occupation of your property (referred to as Lessee or owner) by another (referred to as lesor or tenant).

Broadly, Income tax legislations the world over define income from house property as any or all of the following:

• Periodic payments by the tenant for use of property fully or partially
• Notional rental value of property that is intended for self occupation
• Payments by tenants towards amenities provided with the property
• Any amounts paid by tenant to cancel a lease
• Any expenses paid by the tenant on your behalf
• A security deposit that is intended to be adjusted against unpaid rent or final payment of rent
• Any security deposit that is adjusted because tenant does not comply with the terms of the lease

The type of accounting system you adopt will also make a difference to the amount of income from house property you report under the tax legislation. So most tax legislations recognize two types of accounting proceeduces as legitimate–cash system or accrual system.  A cash system of accounting implies that you account for the rent only when you receive the cash. Under the accrual system you will include all rent that is due to you and not necessarily received.

However, the entire amount you receive from your tenant is not taxable.  The income at the point of receipt is “gross rent”.  The actual taxable rent could be far less than what you have received from your tenant in the course of the accounting year. Why? All tax legislations allow legitimate and reasonable expenses that may be incurred by an individual in collecting the rent or maintaining the property in a rentable condition. The rent arrived at after deducting expenses is the “Net taxable rental income”.

Deductible expenses on gross rental income could include:

• Expenses on upkeep of the property
• Finding a tenant to occupy the property
• Expenses incurred for collection of rental
• Expenses incurred for payment of property tax and
• Other taxes/charges on property.

A few tax legislations may also allow you some deductions such as:

• interest that is paid on loans taken by you for the purchase of property;
• vaccancy allowance for the period when the property remains untenanted or
• loss of income you have appropriated the property for personal use during a part of the financial year.

A few legislations allow a standard deduction on income from house property in place of deductions for various expenses. Other legislations may allow depreciation on house property income.  You must compute your house property income in accordance with the definition of house property income that is enshrined in the legislation of your country of residence and deduct expenses that are allowable under that legislation.

The total income from house property can be a loss if the expenses on property exceeds the gross income from property. This may or may not be set off against income from other heads as defined in the tax legislation of the country.

[Subsequent tax talk posts will be devoted to "How to compute house property Income" under different tax legislations. So stay with us and we hope this information will be useful to you for the tax filing season in your country!]