PROPERTY experts fear the proposed change to tax laws affecting real estate gains could crimp speculation and hurt sentiment in the fragile market.

The issue was a talking point among investors worried about being taxed, while real estate stocks went south yesterday.

'I have received about 50 calls on this topic today. They are all worried about being taxed,' said HSR Property Group executive director Eric Cheng.

If the proposal becomes law in January, it will mean that anyone who sells a property in any four-year period will not be taxed on his profit. But a second sale within four years of the first sale may be taxable.

There will surely be some knee-jerk reaction, though the change may have the eventual effect of dampening flipping interest, industry sources said.

One who declined to be named said if enacted right, the clearer rules will be a benefit, but if they are applied in a heavy-handed way, there will be 'horrible consequences' for the market.

'Speculators may start to think twice about going into the market,' said Credo Real Estate executive director Tan Hong Boon. 'But genuine investors holding for long-term rental income should not worry at all.'

But one investor said: 'Without the element of speculation, the market would not be buoyant.'

Some speculators are already aware that they will be taxed on their profits if the Inland Revenue Authority of Singapore (Iras) deems them traders. But this has been a subjective exercise.

The amendment also does not make clear what constitutes a trader.

'Some people think it's a big deal but the proposed change is not even new. Only the four-year period is new. Previously, you may even be taxed if you trade only one property in your life,' said another investor. 'If you resign yourself to the fact that you will be taxed, you might as well continue selling, if not more aggressively, to cover the tax component.'

To curb speculation, the Government modified tax rules in 1996 so that income tax was payable on profits made from the sale of a residential property within three years of purchase. This was lifted in late 2001.

Property expert Nicholas Mak thinks the change could dampen foreign demand. Some investors hoping to time the market may be taxed on their profits given that the two bull runs in the past 10 years have lasted less than four years, he said.

Tax Proposal Puzzles Property Players

Source : The Straits Times, July 9, 2009

NEWS ANALYSIS

They question timing of change and ask if they must alert Iras when selling second property

A GOVERNMENT proposal to make the rules clearer on taxing gains on property sales has left developers and investors scratching their heads.

Since the public consultation paper on the subject was put up by the Finance Ministry last month, there have been quiet discussions in some circles on the impact the step might have on the property market.

So quiet that most people were apparently unaware of it.

Thus when the proposal finally made it into the news yesterday, investors took it badly. Shares of property giant City Developments fell 6.6 per cent while those of CapitaLand dropped 4.8 per cent.

A Citi report yesterday said the change is likely to curb any excessive speculation in the market. 'We think there will be downward pressure on the prices and volumes, especially new launches,' it said.

At first sight, the proposed change seems innocuous. It makes clear that a home owner who sells his property for a profit will not be taxed on his gains as long as he had not sold any other real estate in the past four years.

But if an owner had sold other properties within that period, the taxman will decide if he should be taxed on the gains from this sale. Its decision will be based on the circumstances that precipitated the sale.

Most home owners will not be affected by the proposed tax change as their home is the only house they own, said real estate agency PropNex chief executive Mohamed Ismail.

In fact, they may be better off as the change provides certainty that they will not be taxed should they sell their house for another home every four years or so.

But an estimated 10 per cent to 15 per cent of home owners own more than one property and these are the people who are worried about how the change might affect them.

An investor does not pay tax on gains unless - and this is where the uncertainty lies - the taxman decides that the owner is a trader, namely someone who buys and sells a number of properties over a short period.

But tax and property experts are concerned over the timing of the proposal.

Real estate is only just beginning to recover from the doldrums it fell into last year, so some feel the Government should have left things as they were.

'In the current economic environment, we do not understand the need for such a provision, as it only provides a certainty of tax treatment for individuals who do not sell more than one property,' said Mr Owi Kek Hean, KPMG's head of tax services.

Others have welcomed the proposal as a strong signal sent by the Government to dampen any speculative froth in the recovering property market.

Only last December, there was considerable concern over the number of home buyers who might default under the deferred payment scheme. But this was quickly forgotten once the market picked up and developers replaced deferred payment with an interest absorption programme to lure buyers back.

With the proposed change, an investor cannot be sure that he can avoid a hefty tax bill on his gains if he sells several properties within a four-year period.

This will surely dampen speculation and help to prevent the market from suffering another heart attack if the global economic outlook nosedives again.

Still, others note that the need to own a house for at least four years to make sure that one does not get taxed on any gains from its sale is far too long for property-loving Singaporeans.

We like to move house a lot, whether to downgrade to a smaller flat in bad times or to be nearer to a desired school. Surely, a shorter timeframe of two years would be adequate.

One reader also noted that the proposed tax change is unfair to investors who hold on to multiple properties for a long period and then decide to sell them all within the same four-year period.

'If I come across a peak in the property market, does this mean I will be taxed if I sold more than one property, no matter how long I have held them?' he asked.

But the biggest question bugging home owners is that they do not know if they should contact the Inland Revenue Authority of Singapore (Iras) to discuss any assessment that may be made on a property sale profit.

Should they alert Iras as soon as they sell a second property within a four-year period and declare any gains while making a case to get a waiver on paying any levy?

Or should they stick to the current practice and assume they are not liable for tax on any gains until they get a call from the taxman?

Whatever their misgivings, home owners should trust Iras to exercise its judgment judiciously on whether to tax the gains