When you own a leasehold property, you become the owner of the building, not the land in which the building is located. An annual payment must be returned to the leaseholder as a rental fee. The duration of such a property can be 30, 60, 99 or 999 years. Once the duration has expired, ownership of the property returns to the landholder. When buying a leasehold property, you need to know the number of years that the property has been on the lease, as it will have a great impact on the value of the property. A leasehold property has many advantages and disadvantages for tenants and landlords. Here we will find the advantages and disadvantages of a leasehold property to help you decide wisely.
Advantages of the Leasehold property in India
The initial investment costs is reduced
In order to build a building, you have to acquire ownership of the land and start the construction process. This increases the overall costs and upfront costs for the project. Now, if you enter into a leasehold agreement with the landowner, it will help him to avoid the upfront costs and also reduce the overall costs of the project.
Cheaper to buy – tenant’s advantage
If you are thinking to buy an already built property, then you need to better go for a leasehold property. The advantage is obvious since you will not buy the land, the property automatically becomes cheap.
Tax deduction – tenant’s benefit
This is another advantage associated with buying such a property. You don’t have to pay tax to federal and state income taxes if you do not hold the ownership of land. However, if you had the ownership of land, the additional charge would be the payment of the rental tax would have been upon you. So, owning a leasehold property helps with tax deduction.
Less responsibility – tenant’s advantage
The responsibility of the property holds upon the developer of the project and the tenant can benefit from not having to worry too much about the property. The tenant can also feel safe by acquiring a lease property. The tenant only uses it for a certain number of years and then the responsibility of the property returns to the landlord.
Tax reduction – landlord advantage
If the landlord of the property sells it upright, he / she must calculate the capital gain and pay taxes for this profit for the year in which the property was sold. This helps the landowner to avoid a large number of tax. The landlord thus profits from it and escapes by paying only an ordinary tax amount.
Ownership Retention – landlord’s advantage
The landlord retains ownership of the property or land if the lease expires. This is a great advantage for the landlord as the landlord can use the situation if the tenant really wants to lease the property for another period.
The tenant will not be able to fully utilize the property. The landlord will further restrict him and make the tenant feel that the property relates to him. If the tenant desires to knock off the old building and wants to build a new building, he / she has to sign a new leasehold agreement. Some landlord does not allow the tenant to own a pet in the building.
Difficult to sell
If the leaseholder tries to sell a leasehold property, the takers will not be many. In fact, it is impossible to sell a leasehold property when the lease comes close to its end.
Necessity to pay premium
If the tenant wants to have a hold on property for a longer period of time, i.e. if the lease is due and the leaseholder wishes to extend the lease period, the landlord is in a state to demand more premium from the leaseholder. The longer the period of the extension, the more premium the tenant must pay.
Hard to get loans
The leaseholder has a very difficult time to get a loan for the leasehold property. Banks will have an extensive background check on the property and still you will not be guaranteed of the loan. The properties with a very short lease period or the properties whose lease is nearing its ends will not even receive a loan.
The leaseholder has the responsibility of making regular payments to the landlord in the name of the annual land rent. Imagine you are the landlord of the building, but nevertheless, you are required to make a payment and it makes you feel that you are staying in a rental apartment.
Since you do not own the property, you will lack the long-term benefits associated with the property. If the value of land increases, the landlord will be the one who profits from it. On vacating the property, you are responsible for taking the property to its original condition. This is the landlord’s right and you will be required to serve it for the landlord. The landlord can pay some of the maintenance costs and get away with the additional pay but you will be required to pay for ancillary costs and internal maintenance as well as repair work and has to bear the load.
Thus, it has both its advantages as well as the disadvantages as listed above. If you happen to own a property, i.e., you are a landlord, putting a property on leasing will definitely benefit you in many ways. However, as a tenant, you need to be careful in deciding whether to lease a property or not and need to collect entire detail before acquiring the lease. But you certainly have many advantages as well as a tenant who is attempting to get a property on lease. Wish this helps you to decide on the type of property.