[ecis2016.org] What is freehold property meaning and implications of buying a freehold land? We explain
What is freehold property? A freehold property is one, where the owner/society/residents’ welfare association owns the building and the land that it stands on outright, in perpetuity. A freehold is generally bought through an auction or lottery. The completed project, thus, will include the cost of the freehold land incorporated in the final cost of the units.
You are reading: Freehold property and land: Meaning, title and ownership explained
What is freehold property? Meaning
Meaning of a freehold property is a property that is legally ‘free from hold’ of any entity other than the owner. The owner of such a freehold property has the right to use it for any purpose, in accordance with the regulations of where the freehold is located. The sale of a freehold property requires significantly lesser paperwork, as it is not necessary to request authorisation from the state. However, this also means that a freehold property is more expensive to purchase than a leasehold property.
Freehold property advantages
As the name suggests, freehold property signifies complete freedom. Thus, the owner of the property has complete control over the freehold premises and has no further payments to make, in the form of ground rents, service charges or any other kind of charges that might be in the case of leasehold properties. Thus, the owner knows the exact amount he spends for purchasing the property. A freehold also has no restriction regarding time, visitors and the like. Thus, the owner can do whatever he legally wishes to within his property, without being answerable to anybody else.
Freehold property disadvantages
The only disadvantage of freehold properties is that they are more expensive. Since an individual owns both, the land and the property, to have complete control over it, the cost incurred on it increases. Thus, such properties might be difficult to be purchased by individuals who are used to staying in flats or apartments, where they just own the property and therefore, pay a lower price.
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Freehold land title: Meaning
Freehold land title refers to a freehold property title by which the owner of the freehold land owns it for perpetuity (free from hold). In other words, freehold land title ownership has no limit in time for the landowner and its beneficiaries.
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Freehold land: Pros and cons
|Pros of freehold land
|Cons of freehold land
|Freehold land is easy to sell, as the ownership lies with the actual owner.
|Freehold land is costlier than leasehold land.
|Bank loan and refinancing is easier for freehold land.
|For freehold land you may need to pay more down payment for blocking the unit.
|For freehold land, the capital appreciation is more, as compared to leasehold property.
Is freehold property an asset?
For income tax filing for businesses, it is imperative to show certain fixed assets which need to be installed like furniture, office building and plant & machinery, etc. While stocks, cash on hand and debtors are considered as current assets, freehold land and building is considered as fixed assets.
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Freehold property rights of the owners
There are no restrictions on the right of an owner of a freehold property to transfer it further and it can be inherited. There is no encumbrance to the absolute freehold title of the property and it can be transferred, by registration of a sale deed. When you purchase a freehold property, you also own the land it was built on (freehold land), along with the house itself. If the freehold property is an apartment, the home owner becomes a shareholder in the freehold property. You have the right to live in the house as long as you wish and you can also make changes to it.
While most houses in India are sold as freehold properties, apartments are also sometimes sold on lease. However, this is gradually changing, as buyers feel more confident in purchasing a property that is freehold.
Freehold land does not depreciate
Freehold land is not depreciated, because freehold land is assumed to have an unlimited useful life. Other long-life assets, such as land improvements, buildings, furnishings, equipment, etc., have limited useful lives. Since the owners of leasehold assets cannot sell the property, the depreciation is not factored in leasehold property.
Can freehold land be taken back by the government?
Under the Land Acquisition Act, the government has the right to acquire all types of freehold title or private land for the purpose of industrialisation, development of infrastructure facilities or urbanisation of the private land, after compensating the affected land owners suitably.
Home loan for a freehold property
Banks are generally more willing to extend a home loan for a freehold property, as compared to a leasehold property. This is because it is considered a safer investment, as the registration of a freehold property is done and it is also expected to increase in value. Banks are also willing to sanction a larger home loan amount for a freehold property with a high market value (where the loan-to-value ratio can be 80 per cent of the market value of the freehold property).
Freeload properties or freehold land involves several risks and responsibilities that might cause high expenditure. For example, the freehold property may be damaged by a storm or a fire. Thus, the owner of a freehold property requires an insurance to cover for the financial expenditure, in case of any freehold property damage. The freeholders’ insurance policy provides adequate financial cover for both, the freeload property and freeload land, in case either of it is damaged. The premium against the insurance depends on the size and net worth of the freeload property. However, once the owner of a freehold property is eligible for such an insurance, the risks involved in owning a freeload property can be minimised. A freeholder’s insurance policy not only protects the freeload property or freehold land from any loss but also provides adequate financial cover, in cases of loss of rent if the property is found to be uninhabitable.
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Freehold ownership: Conversion to freehold property from leasehold property
What is freehold ownership?
A leasehold property can be converted to a freehold property through a clear sale deed, a general power of attorney and a no-objection certificate (if the land is under mortgage or rent). Additionally, you would also need to pay a conversion charge, to the relevant authorities. In Delhi, a property owner can get the status changed, using only the registered agreement to sell and the general power of attorney. In Maharashtra, the state government has set the rate for the conversion of leasehold property to freehold at 25% of the ready reckoner (RR) rate.
Documents needed for converting leasehold property to freehold property
For converting an immovable leasehold property into a freehold property in Delhi, there are certain documents that need to be submitted by the applicant to the Delhi Development Authority (DDA):
- GPA (general power of attorney).
- A clear sale deed.
- No-objection certificate (NOC) if the land is on rent or mortgaged.
The applicant must also pay the conversion charges to the Authority.
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Freehold property conversion charges are tax-deductible: ITAT
In a recent judgement, the Income Tax Appellate Tribunal (ITAT), Allahabad Bench, allowed the tax deduction on the share of freehold conversion charges, stamp duty, etc., for converting a property into freehold. The assessee had contended that the freehold conversion charges constituted improvement of the property for better title of the property and claimed the same as deductions towards the cost of improvement of the property while computing long term capital gains tax. To this, the court ruled that that the assessee had rightly claimed the deduction on account of improvement in the property being an improvement in the title of the property on being converted from leasehold Nazul land to freehold property. Also, the court agreed that making the property freehold, would grant perfect ownership rights/title in favour of the existing lessees, who would then be in a position to transfer/sell the property.
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Freehold property: Latest news
Maharashtra invokes order staying conversion of leasehold land to freehold land
The Maharashtra State Revenue Department has now cancelled its orders staying the conversion of collector’s land (Occupancy Class II lands) to freehold. The collector’s land requires prior approval from the collector for the transfer of the land to the occupants of the land. The stay orders were issued towards the end of 2020 as there were allegations that the conversion was being misused. The move will benefit about 3,000 Mumbai societies that are living on collectors land. These 30,000 housing societies are as old as 50 years.
However, the housing societies say that the conversion charges are unaffordable and the scheme for conversion will remain on paper.
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What is a freehold property?
Freehold property is any real estate that is legally ‘free from hold’ of any entity other than the owner.
How to convert leasehold property to freehold?
A leasehold property can be converted to a freehold property through a proper documentation process, as mentioned in this article.
What is the difference between freehold and leasehold property?
The major difference between freehold and leasehold properties lies in the ownership status and control rules.
(With inputs from Surbhi Gupta and Anuradha Ramamirtham)
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