Save your tax when you sell your real property in China

This morning, on behalf of my client from Singapore who sells her apartment, I went to local tax bureau to pay the related taxes.

It was finally confirmed that my client will not need to pay the personal income tax as prescribed in a regulation in which it is required seller shall pay the personal income tax equal to 20% of the difference of sale price and the original purchase price if the property being sold is acquired by way of gifting, or inheriting.

Here is the story: client inherited the property from her husband who deceased in 2010, and client  has done all the things to effect the title deed under her name. This apartment was bought during their marriage and was deemed as community property for the couple which is generally understood as each spouse holing 59% of the ownership interests of the community property. After inheritance, the client acquired the interests in the property of her husband.

Legally speaking, client has inherited half value of property. Under the mentioned regulation, when selling real estate acquired by way of gifting or inheritance, seller shall pay personal income tax equal to 20% of the difference of sale price and the original purchase price, unless the seller has held the gifted and inherited property which must be the only property in his or her name, for more than five years. Leterally, client shall pay an income tax of 20% of half the difference of  sale price and the original purchase price which was acquired by inheritance.

As a real estate lawyer practicing law here in Shanghai for years, I was aware that there is always leeway or room to take advantage of loopholes in law. Knowing that there is a clear rule for many years saying that when one sells his only residential property which has been held for more than fives years, he is exempted from paying any personal income tax. With that in mind, I see a possibility to save client a lot of tax burden if we can convince the tax bureau that though the client has held the property in her name for only around one year, considering that this house is community marital property bought fifteen years ago by the husband, it can be argued that the client has owned the property for more than fifteen years. I then talked to several people with the tax bureau and then finally reached out to the head of the bureau from who I get a nod for my understanding of the situation.

Finally, we saved the client hundreds of thousand RMB in tax.

It shall be noted that this same tactic may not be applicable where the seller sells a house he acquires from by way of gifting or inheritance but the house is not a community marital property.

Jason Tian

Jason Tian, specializes in foreign-related legal services ranging from foreign investment in China, banking and capital, real estate, M&A, corporate, international trade, estate planning, inheritance and divorce at his blog: http://www.sinoblawg.com.

12 Comments

  1. Lim PH   •  

    Dear Jason, I am a foreigner and residing outside of china. I would like to sell my commercial property in Tianjin bought many years ago. Please let me know how I can contact you to discuss about your services and the sales process. Thanks

    • Jason Tian   •     Author

      Hi Lim, you can contact me at my emails shown on the blog. Or if you wish, we can have phone talk at the phone numbers you can find on the homepage of this blog.

  2. Tom   •  

    Dear Jason, i own flat in beijing which i bought in 2003 and finished payment 2013, and second one bought in 2007 and its still paying off bank. I would like to sell them both asap at the highest possible price and wire it out of china. How long will this process take and wut is ur service fees? Thank u

    • Jason Tian   •     Author

      Hi Tom, i will send you an email regarding my services and fee. You are from Singapore? I have been helping quite a few SG clients in selling their properties in China, in Shanghai and Shenzhen, and now in Beijing.

  3. Vivian   •  

    Hi Jason,

    My dad owns a house in Shanghai before we immigrated to the US. He is a US citizen now. My mom is a US permanent resident (green card holder) who also has Chinese 户口簿和身份证。The house currently only has my dad’s name on the deed. But my mom’s 户口 is there and that’s the only 户口 on the house. We have been living in the US since 1998. My questions are:
    1. If my dad sells his house in China, does he have to pay tax in China? If so, what kind of tax and how much? Does he have to pay tax in the US? I assume he would have to pay capital gain tax in the US which is up to 15% but will get credit for the tax he already paid in China. Is there any leeway to this?
    2. If he does not sell the house and my mom inherit it from him when he passes, does my mom have to pay inherent tax in China? If my mom sells the house, does the tax you mentioned in this blog apply to her? Again, my mom has US green card but also has Chinese 户口。Is it better to add her name to the deed now?
    3. If I inherit the house from my mom when she passes(I’m US citizen), do I have to pay inherent tax? Is it better I inherit directly from my dad? Can this be done with my mom still living?

    Thanks for your help!

    • Jason Tian   •     Author

      when you say “own” a house before immigration, i am assuming that you are saying that he has the title deed. There are still many old houses in Shanghai where the people living in those houses don’t have title but just a lease right by paying a certain fee to local government. this is not privately owned houses, but public properties that cannot be inherited.

      1. he of course needs to pay taxes. As a seller, he is subject to personal income tax and VAT tax (business tax in the past), and he may be exempted from paying the China income tax because he has owned the property for more than 5 years and this is the only house he owns in Shanghai. the VAT is 5% of the difference between sale and purchase prices.

      I don’t know much about USA taxes, please talk to your local tax planner. I do know that there is a tax treaty between USA and China to avoid double taxation on certain income.

      there is a provision therein “Income derived by a resident of a Contracting State which may be taxed in the other Contracting State in
      accordance with this Agreement shall be deemed to arise in that other Contracting State”. Under the treaty, real estate income may be taxed in the other contracting state. Subject to your local tax advice, you may be able to exclude this income tax from your filing with USA.

      Remember that your father may be exempted from paying income tax here in China, what impact on the American tax remains your question.

      2. there is so far no inheritance tax in China thought it has been discussed for years. She will also need to pay income tax and VAT tax. You can add her name onto the deed, but what is the point for doing this now?

      3. Considering that there is hurdle for your mom and dad to repatriate sale proceeds out of China, I would suggest that you obtain the title now as a USA citizen and then you sell the property and take the money out of China. You can ask your Dad to gift the property to you. You will be paying a 3% deed tax only. It is an advisable decision to make esp when you wish to sell the property and take the money out of China.

      Of course, you can wait to inherit the property after your Dad dies, in which case you can inherit it alone with your mom waiving her right of inheritance. Indeed, this may still involve a gifting process as your mom will have to gift her share in the property (given that this property was bought after your parents got married).

      Please email me for more discussion.

  4. lynn   •  

    Dear Jason,
    I am a Singaporean living in Singapore. My partner and I have an apartment in Shanghai. We want to sell this apartment, how much are your legal fees in RMB if you represent us in Shanghai.

    What are the sales procedures if you represent us.

    Kindly advise.

    Thank you.

    Yours sincerely,

    Lynn

    • Jason Tian   •     Author

      Hi Lynn, I will reply you in an email to you soon.

  5. Shadi Elhalabi   •  

    Dear Mr.Jason:

    I would like to consult you regarding to the matter of selling foreign property to a chinese local citezen and what the procedures need to be taken to acomplish such a transaction.
    I have a foreign friend who own a land in a one of the industrial zones and wishes to sell the piece of land to one of the local investors, but he faces some complication from the local government and the managment of the industrial zone where they claim its restricted to sell the property to a chinese investor and only can be sold to foriegn investors or ( JV ) and the transaction must be wired by a foriegn currency and must be from outside china main land; please advise me if that is true while i could not find any information or details regarding to this matters on the websites, and if there is any alternative way of doing the transaction without all these complications. and what procedure you will take if we use your assistance to acomplish this deal.
    appreciate your fast reply.
    Shadi elhalabi
    Shadi_elhalabi@hotmail.com

    • Jason Tian   •     Author

      HI Shadi, by “foreign property” i guess you are referring to a property outside of China. But you are also seeming to talk about a Chinese land in some industrial zone. I need to clearly understand this point before I can share with you my view on your issue. I guess the local government is being unreasonable to bar the property from being sold to Chinese investors. Their intention is to get more foreign investment into their area so that they can boast their job performance in front of its people and its superiors.

      I have also asked you to send me more information about the land and the deal so that I can give you a meaningful advice. if you feel the need to give me a call, please call at 0086-13816548421. Jason Tian

  6. Law Tan   •  

    Dear Mr Jason, I am a foreigner who bought a condo in Shanghai 5 years agao. I have a buyer who has paid the Option to Purchase deposit and he told me that I don’t need to use a lawyer because his lawyer will ahndle all the necessary S&P transaction for this sale. He told me I can save on the lawyer fee and also there is no need for me to pay any tax. I have a work permit to work in Shanghai since 2007. Is this information from my buyer, true? Kindly advise, thank you./Law Tan

    • Jason Tian   •     Author

      Dear Law Tan, I don’t think it is a question that needs my answer. Whether your counter-party has a lawyer at his or her side before the negotiation table, when you need a lawyer depends on how you feel in that situation. No one says that a lawyer is necessary in the real estate transactions. In Shanghai, the majority of real estate deals are made between Chinese people with no party having a lawyer at all. But that is the way Chinese people do businesses.

      For a foreigner, unless you fully trust the buyer, like he is your colleague or friends, or that you yourself are fully aware of the pitfalls in real estate transaction, you will be definitely in an unfavorable condition when the buyer has an attorney. Unlike realtors, lawyers only care about the interests of the parties who pay him or her the legal fee.

      So it is up to you whether you want a lawyer.

      You may want to read more information about selling real estate in China in respect of the repatriation of your sale proceeds to your home country. I think there are quite a number of issues for you to consider when you negotiate the terms of sale with your buyer.

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