Shanghai cracks down on capital gains tax
City targets secondary home sales in renewed cooling bid
Shanghai is taking the lead in strictly enforcing the collection of capital gains taxes on property sales in a renewed effort to cool the booming housing market.
Luwan district, which has some of the city's most valuable real estate, on Thursday announced that the tax, introduced by the central government last year, had to be charged at 20 per cent on capital gains from sales of second-hand residential property.
The new directive, which took effect on May 24, is expected to be implemented soon in all other districts in the city.
Property agents believed it could result in a fall of as much as 20 per cent in residential secondary market transactions because of the increase in trading costs.
Other mainland cities would follow suit as part of the central government's campaign to rein in the surging market, property consultants said.
In Shanghai, sellers generally pay 1 or 2 per cent of the transaction price as personal income tax due in part to the way the tax is calculated.
'What the measure [by the Luwan district government] wants to say is: 'No more loopholes and you have to follow it strictly',' said Andrew Ness, an executive director of CBRE Research, a unit of CB Richard Ellis.
The city is acting after property prices in Shanghai rose 0.6 per cent last month from April last year. That was slower than the 5.4 per cent overall gain in urban prices in the country and increases of 9.4 per cent in Beijing and 12.8 per cent in Shenzhen, according to the National Development and Reform Commission.
Urban property prices rose 5.9 per cent year on year in March.
Mr Ness said the government was also nervous that a large amount of cash realised from capital gains made in securities transactions would flow into the property market over the short term, leading to another boom in the sector.
'Hence, the Shanghai government is merely acting in a pre-emptive way to prevent another round of market overheating,' he said.
Personal income tax would be charged on 20 per cent of capital gains after allowable deductibles such as business tax and decoration expenses if the property is sold within five years of purchase.
As calculating allowable deductibles is complicated and some items are arguable, property trading centres that collect the tax for the district governments choose an easier calculation method, property agents say.
Clement Luk, a director of Centaline (China), said his clients were shocked by the directive.
'We are worried that some clients may walk out of deals as the new directive will increase transaction costs, especially for luxury properties, which saw higher capital gains in the past few years,' Mr Luk said.
'If the measures are imposed in all districts in the city, transaction volume will fall as much as 20 per cent in the short term.'
Monthly transactions of luxury units, which meant property with sizes of more than 140 square metres, averaged at 20,000 in Shanghai, he said.
The measure was a signal from the government that more steps would be taken if the property market continued to boom, said Albert Lau, the managing director of central management at Savills.
Mr Lau said the Shanghai residential market had become very active since January, with monthly transaction volumes jumping from 900,000 square metres in February to 2.3 million sqmetres last month.
The Shenzhen municipal government, meanwhile, may issue a measure requiring homeowners to sell their properties at prices at least 20 per cent above their purchase prices, according to market rumours.