Capital Gains Tax Stimulates Property Market in ChinaHomebuyers were caught by a surprise when the State Council, China’s cabinet, issued a notice on March 1st announcing a broadened approach on curbing speculative purchases in the property market. According to the notice, secondary home transactions will be subject to a 20% capital gains tax. In fact, such regulation has been on paper for years, but was never strictly implemented by local tax bureaus as home prices are difficult to be verified. Home buyers could always opt to pay a sales tax equivalent to 1% to 2% of the transaction price instead.

Echoing to the Government’s efforts, local governments will soon release more followup policies and detailed implementations of their plans. Dongguan and Jinhua have already cut the ceiling amount of state subsidised housing funds that can be used for mortgage payments, following Kunshan’s new policy to raise requirements for those seeking subsidised housing. The People’s Bank of China, the Mainland central bank, also raises down-payment requirements and interest rates for second mortgages in cities with excessive price gains.

Sales volumes of second-hand homes have surged immediately following the announcement. Over the fears of the upcoming 20 percent capital gains tax, many homebuyers are quickening their pace to complete their deals, while some hesitated buyers also rush into the market before their local governments announced details of how such a tax will be levied. In Beijing, the Commission of Housing and Urban-Rural Development recorded 1,073 and 1,028 registrations of second-hand residential property transactions respectively on the first and the second day after the new policies announced. Over the week, the total number amounted to 9,400, averaging over 1,340 registrations per day, up 140.5% from last week and 279.5% from a week before last week.

Much like many other new regulations in the past, the early reactions could go a bit extreme in China. And this time, people are getting divorce.

In some big cities such as Shanghai, Nanjing and Wuhan, marriage registration centers are inundated with couples who are filing for divorces. A center in Zhabei District in Shanghai saw a record of 53 divorces in a day, with 250 more people on the waiting list. One of the many benefits of untying the knot is that a couple who has more than one flats could then purchase another home, pay less for down payment and get a better mortgage rate. Couples who want to sell one of their flats can also choose to divorce and split up their assets, so one of them can sell the property as his or her only flat without paying any capital gains tax. They can always remarry after the transaction completed, until they have another flat to sell.