I’m sure many have heard that divorce can be financially devastating for a couple. But in a country that has over a billion people, couples are divorcing like their future retirement plans depend on it. And in a way, it’s true. China is home to some of the most unaffordable real estate in the world. If you think housing in Vancouver is expensive for a middle class family, think about what life must be like for a middle class family living in Beijing (O_o)
In order to curb high housing prices the Communist Party of China announced a new tax on property sales last week. It states that owners who sell their non primary residence have to pay 20% tax on any profit they make. To take advantage of a tax loop hole many couples in the country are getting divorced and taking one property each. This way neither of them will have a second home anymore, and neither of their properties will be subject to the new tax. Registration centers in various Chinese districts are reporting thirty to a hundred percent more divorces than normal. Furthermore, the number of people applying for proof that they are now single has gone up multiple folds.
A 700 sq-ft apartment in a large city goes for about $400,000 USD. But just five years ago the same apartment was only worth about half as much. According to the IMF the average person in China only makes about $6600 USD a year. Imagine if a couple bought a property 5 years ago and can sell it today for a $200,000 profit, wow! If used wisely this windfall could probably fund someone’s entire retirement because relative to income levels that’s the equivalent of someone in Canada or the US winning the lottery! What about any lasting distress or awkwardness for the family after the divorce? Not to worry because The Shanghai Daily mentioned that these same couples were remarrying as soon as one of their homes were sold tax free 🙂 Might be tough for couples with children to explain what a “tax divorce” is to their kids though 😀
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Random Useless Fact:
Can’t say I blame them. That’s a huge bite of the profits for a pretty simple get around. It’s not like you need a piece of paper to show that you’re committed. I’d be very tempted to go this same route. I had no idea that the house value to income ratio was that out of whack in China! And I thought the coasts here in the USA were way too expensive.
I can understand why they’re doing it too. Don’t know about other places but lottery winnings aren’t taxed from where I live. If one day they changed this rule people here would probably try to find a way to avoid the tax as well.
I remember reading about this. It just goes to show you that how economic incentives are structured can have a huge effect on people’s behavior. Including promoting divorce.
And it will skew the divorce rate of the country making it hard to calculate the numbers of legitimate reasons for divorce.
Wow, that’s crazy. You’d figure they would have not allowed that loophole. I guess it just goes to show you that the US government is not the only one that is backwards. 😉
I wouldn’t be surprised if the next thing they try to do is to close this loophole. But I’m not sure how they would even go about regulating such things as personal and emotional and marital issues lol.
In France it is 27% and they just made the amortization table over 30 years instead of 15 before. Never heard of people getting divorced for that though, thanks for the tip haha.
I’ve always wanted to go visit France. In Canada, it used to be 30 years, and then it was 40, and then 35, and now 30 again, lol. I don’t like it when government’s keep changing amortization rules.
What? That’s crazy!
The extremes some people will go to save money I guess 🙂
not surprised. its been done many times before when they introduced stricter 2nd home mortgage down payments, and 2nd home ownership limitations, etc. the list goes on. the core of the problem is people in china all of a sudden have this extra money they have no idea what to do with. chinese capital markets are nowhere near as accessible as north america, which removes a large area assets can flow towards. this is a govt induced problem and the result will destroy a generation’s life savings when the RE bubble pops.
I guess that’s why so many people there are trying to leave the country and park their extra cash in Australia and Canada haha. I’ve heard foreign capital is the main reason why Sydney’s real estate is overvalued, similar situation to our Vancouver and Toronto. That’s interesting that capital markets aren’t very accessible to the Chinese population. With a booming middle class one would think financial institutions would all be competing for everyone’s business by offering mutual funds, retirement/insurance plans (a lot of which have an investment structure) etc. I can see why personal brokerage accounts may be relatively rare, but I wonder why financial advisors and mutual fund managers aren’t doing more to sell their products. Maybe there’s some trust or compliance issue or even regulation that’s preventing retail investors from getting into stocks and bonds, because I know shadow banking is a huge business in some parts of the world.
Leave it to the Chinese to figure out such a ridiculous loophole…
It’s interesting to see the different financial dynamics in different countries. And to think just a few decades ago China was all about communism. Big difference compared to now.
Wow! That’s nuts! I always knew real estate in China was expensive but figured it was somewhere along the lines of Los Angeles prices here in the U.S. come to find out I was no where close. Thanks for sharing the eye opening info.
Sometimes I wonder how low to medium income people in China can afford to live in big cities, but reports have shown that urbanization in that country is alive and well.
Oh wow, it totally stinks that couples are having to get divorced to save on taxes, but I guess if I was in that situation I’d have to think about it as a real option.
It’s a really grey area. If the tax savings are big enough for those couples it might mean the difference between working until they’re 65 or 55 🙂 If I were in their shoes I would probably consider all my options too.
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