Saturday, November 24, 2007

Another unsolicited offer (1)

I received a call from a real estate agent today saying he had a firm offer for one of my properties. Leaving aside the question of where he got my mobile number and the fact that I have no interest in selling the property, the offer is at a level which indicates a solid increase in price. Although I have not kept precise records of the cash flow on the property, a rough calculation would suggest that accepting the offer would result in a realised return (net of all costs etc) on capital invested of somewhere between 21 - 24 % pa.

I'm not interested in selling for the following reasons:

1. what would I do with the money? I would just turn around and look for another property to invest in. Unless I am trading up, all I will end up doing is incurring a lot of transaction expenses;

2. I have sold one property this year already. If I make a habit of selling properties, I risk being classified as a trader for tax purposes. If that happened, I would have to pay profits taxes on all future property sales (excepting our home). Even at Hong Kong's middle of the range tax rates, this is a very high cost.

I wish all my investments would do this well.

2 comments:

Raphael said...

I'm interested to see your comment regarding profit tax. I had thought that with any investment property (ie. non-self use) you would have to pay profit tax on the capital gains regardless of whether you hold for the short term or long term?

Maybe this isn't correct? Any thoughts?

As you mention, profit tax has a huge impact on the internal rate of return for a property investment so I'd be very interested to find out more about this!

Another question, can you deduct costs (e.g. mortgage interest) from investment properties when calculating the part of the capital gains that are subject to tax?

Thanks!

traineeinvestor said...

Hi Raphael

My understanding of the Hong Kong tax position is essentially that investors will be taxed either:

(i) as passive investors on rental income (less interest cost and rates which are the only deductables in addition to the standard "broad brush"20% allowance); or

(ii) as traders (or persons who run a business of trading real estate) in which case the gain on disposal will also be taxable.

Whether a person falls within (i) or (ii) is largely a matter of intention and there are many factors which the revenue authorities may take into account as evidence of intention. Time of holding is one factor, but there are many others as well.

The position is different if you buy through a company rather than in yoru own name as companies can deduct more expenses.

I'm not sure what the rules are on deductions on sale if you are subject to tax. Intuitively, since a tax on profits on a sale will only arise if the vendor is carrying on a business, it would be logical for all expenses to be deductable.

Needless to say I am not a professional tax adviser.