China to Enforce 20% Capital-Gains Tax on Home Sales

China will start enforcing a 20 percent capital-gains tax on the sale of second-hand homes that local governments haven't collected since it became law in 1994, stepping up efforts to cool surging property prices.

Sellers will have to pay the tax starting Aug. 1, the State Administration of Taxation said in a notice posted on its Web site last night. The tax applies to all sales unless the property was bought more than five years ago and is the seller's sole residence, the statement said.

China's Premier Wen Jiabao is trying to rein in home prices to avoid a collapse that could cause an abrupt slowdown in the world's fastest-growing major economy. The government on July 24 announced restrictions on real estate purchases by foreigners, after home prices jumped almost 30 percent in the first half in the southern city of Shenzhen alone.

``Tax enforcement will damp trading and affect home prices,'' said Yu Jinhua, an analyst at United Securities Co. in Shenzhen. ``In the past, local governments defied the law as they wanted to see an actively traded market.''

Shares of China Vanke Co., the country's biggest listed developer, fell for a third day, losing 2.5 percent to close at 5.78 yuan (72 U.S. cents) on the Shenzhen stock exchange. Shanghai Lujiazui Finance & Trade Zone Development Co. fell 3.3 percent to 7.66 yuan on the Shanghai exchange.

The government since early last year has imposed higher down payments, raised mortgage rates and told banks to curb lending. Foreign investors will be restricted from buying luxury villas, office buildings and apartments to curb soaring real estate prices and prevent inflation, the government said on July 24.

Price Surge

Average residential and commercial property prices in China's 70 largest cities rose 5.8 percent from a year earlier in June, according to a July 20 report by the National Development and Reform Commission. Home prices in Shenzhen jumped almost 30 percent from a year earlier in the first six months, according to the city government.

Premier Wen pledged at a meeting of the State Council, or cabinet, yesterday to step up controls on the property market and curb excessive price increases in some cities, state broadcaster China Central Television reported on its Web site.

Still, Chen Zemin, an analyst at Shanghai Academy of Social Sciences, said home prices may surge, rather than fall, if the capital-gains tax is enforced because sellers will shift added costs to buyers.

``The collection failed previously and I don't think it will work this time,'' Chen said.

The government of Hangzhou in eastern China started imposing the 20 percent capital-gains tax on January 1, 2004, to cool the city's property market, only to see prices soar, and scrapped the policy eight months later.

Home decorating costs and mortgage interest payments can be deducted from the capital-gains tax, the administration said in yesterday's notice. The levy is contained in China's 1994 Personal Income Tax Law.

To contact the reporters for this story: Jianguo Jiang in Shanghai at jjiang@bloomberg.net; Samuel Shen in Shanghai Sshen3@bloomberg.net

To contact the editor responsible for this story: Bruce Grant at bruceg@bloomberg.net

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