The government will impose individual income tax on second-hand property transactions from August 1, a move that's expected to further squeeze speculation in the overheated market.

The government will levy an assets transfer tax on second-hand house trading from individual sellers with a fixed rate of 20 per cent, and the base of the tax is transaction price minus the original price, according to a State Administration of Tax announcement on Wednesday.

Reasonable costs, including home improvement and facility maintenance expenditure as well as mortgage interest, would be excluded from the taxable amount.

Preferential tax treatment will be given to sellers who sell their house and rent a house to live in until they purchase a new property within a year after selling.

Homeowners who sell a house that is the only property the family has lived in for more than five years will also enjoy a tax exemption, according to the announcement.

According to the rule, taxation bodies should set up special counters at real estate intermediary agents to collect the second-hand transaction tax directly, along with other compulsory taxes on the contract, sale and land.

The policy is a further move by the central government to curb gambling in the real estate sector and to stabilize prices. Taxation policy has long been viewed as an effective tool to adjust the real estate market.

Last year, the government said tax should be collected on second-hand property transfers within three years of purchase.

In a State Council executive meeting on May 17, the central government vowed to use a mix of credit, tax and land policy to cool the currently overheated housing market.

As of June 1, a 5.5 per cent transaction tax is now being charged to people who sell their property within five years of purchase.

"Those policies, to some extent, have effects on reining in the market, but (they are) rather slight," said Su Ming, vice-president of the Finance Research Institute of the Ministry of Finance, adding that the impact of any macro-control policy would not be seen immediately.

Su said China was becoming a market-oriented economy and thus the macro-control policies to date have been prudent.

He said the government hoped its adjustments would keep the development of the economy healthy.

Yi Xianrong, a researcher with the Chinese Academy of Social Sciences and a long-time critic of the property market, indicated that the new policy was just a supplement to the previous provisions.

"However, the tax is not a practical tool to get rid of real estate gambling, considering the difficulties in supervising the whole procedure of the transaction will discount the results of the compulsory regulation," said Yi.

Agents dealing with second-hand properties believed the tax would deal a blow, if not very heavy, on their businesses.

Sunco, a nationwide intermediary chain, said that its clients, house sellers, were rushing to complete their transactions before the new tax comes in on August 1.

The rush to push through transactions before the deadline is expected to reappear in Shanghai just as it did two months ago when house sellers tried to evade a 5.5 per cent increase in transaction fees, said Lu Binbin, general manager of 5i5j Property Company, East China.

"Obviously, this new taxation measure will reduce the trading volume of second-hand houses in the market and meanwhile will drive up the price in the short run," said Weng Haitao, a researcher with the Shanghai office of Savills China.

(China Daily July 28, 2006)