Capital gains tax

20% capital gains tax on mainland properties sparks stampede

Reintroduction of capital gains duty prompts rush to complete transactions before measure becomes effective

PUBLISHED : Wednesday, 06 March, 2013, 12:00am
UPDATED : Wednesday, 06 March, 2013, 4:40am

The reintroduction of a 20 per cent capital gains tax on the sale of property on the mainland by the State Council last Friday triggered a stampede by home sellers and agents to register their sales with government agencies before the tax becomes effective.

Real estate exchange centres in Beijing, Shanghai, Nanjing, and Wuhan were packed with property sellers and agents over the weekend, forcing some of them to extend their opening hours until 9 pm, from 5pm on normal days.

Some property agents even queued overnight on Saturday to help their clients complete their transactions by transferring the property title or ownership to the sellers. The government announced no timetable for the introduction of the tax.

The number of residential transactions in the secondary market registered with the real estate exchange centre in Beijing on Saturday nearly doubled to 1,059 deals, but then dropped to 400 on Sunday.

"On a normal working day the numbers are only 500 to 600 and only a few on a Sunday. Now we expect queues outside the centre will persist for the whole of this week," said Zhang Dawei, research director at Centaline China. He attributed the sharp rise to the stricter measures announced by the State Council to curb speculative and investment demand.

On March 1, the State Council issued guidelines instructing local governments to strictly follow policies introduced to cool the property market. The order follows a rise in prices in the secondary market in some cities of as much as 15 per cent since the middle of last year.

The most important item among the guidelines was the reinstatement of a capital gains tax at a level of 20 per cent, first announced in 1994 but never strictly enforced. It is not yet clear when the centrally administered capital gains tax will replace the present practice by local governments of charging a 1 per cent or 2 per cent sales tax on property transactions.

Concerned by the effect the capital gains tax will have on sales, some owners of luxury homes have cut their selling prices by 5 to 10 per cent to entice a sale, said agents.

"We encountered one case where the buyer and vendor signed a deal and sent the legal documents to the real estate exchange centre to transfer the title on the same day," said Zhao Yijun, a sales director at Centaline's Nanjing office. "To speed up sales, a handful of vendors are willing to offer discounts of 100,000 to 200,000 yuan to lure buyers to sign the agreements."

Zhao said sales of homes in the secondary market would decline as higher transaction costs would dampen buying appetite. "We don't see any panic selling at the moment. Only vendors who have seen the value of their flats rise significantly are cutting prices," he added.

Clement Luk, chief executive at Centaline (China) for eastern and northeastern China, said home prices would likely flatten out, rather than decline substantially. "Since there are limited investment alternatives on the mainland, most owners prefer to hold property rather than sell at discounted prices."

Homeowner James Au is one such owner. "My two flats are in prime locations in Shenzhen and I receive a total of 6,000 yuan (HK$7,400) in monthly rent. Whenever a new measure comes out of Beijing, local governments have their ways to deal with it.

"I don't worry that the market will enter a slump and have no plan to sell the flats," he said.

Au bought two units in Lo Wu, each of 40 square metres, for 550,000 yuan each four years ago. The flats are together now worth about 1.5 million yuan.

Under the current practice, Au would only have to pay 15,000 yuan, or 1 per cent of the total transaction value, if he sold the two flats for 1.5 million yuan. Once the 20 per cent capital gains tax becomes effective, he will have to pay 80,000 yuan if he resells the two units for a total profit of 400,000 yuan.

Kenneth Pak Kei-yuen, a senior general manager in Midland Realty's Beijing office, said the surge in transactions over the weekend was also fuelled by home seekers who speeded up their purchase decisions.

"On the mainland, it is a common practice for the seller to pass the tax to the buyer. So some buyers decided to purchase flats ahead of the launch of the 20 per cent capital gains tax in order to save on the transaction costs," he said.