Wednesday, July 9, 2008

Fix resale levy as percentage of cash proceeds from sale

Source : Straits Times - 7 July 2008

THE HDB requires home owners who sell their flat and buy another new one, to pay a $40,000 resale levy.

The rationale behind the levy is simple: To prevent second-time new flat buyers from benefiting equally with first-timers and so reducing the chances of first-timers getting a flat of their choice.

However, $40,000 is quite a hefty amount and may not be fair to home owners who buy a new flat from the HDB for the second time.

The reason is simple: The amount of cash each home owner pockets after the sale of his flat can vary widely, depending on location and other factors. It can be anything between $80,000 and $400,000 and more after he pays back his housing loan.

If the flat is more than 30 years old, chances are the housing loan was paid off long ago, especially if it was bought direct from the HDB. This means the home owner pockets all the cash without having to pay any outstanding loan. Furthermore, if the flat is in a hot location like Toa Payoh, Bishan or Queenstown, it could fetch a high price of between $600,000 and $800,000.

Paying a $40,000 levy in cash is only 6.7 per cent if the sales proceeds are $600,000, provided the home owner pockets all the proceeds with his housing loan paid off years ago.

But a $40,000 cash levy is a hefty 48 per cent if net cash proceeds are only $83,000 after another home owner has paid the outstanding loan to HDB and CPF.

So fixing the cash levy for second-time new flat buyers at a flat $40,000 can be rather unfair.

To solve this problem, fix the resale levy at a rate of, say, 10 per cent of net cash proceeds from the sale of a home owner’s flat.

This means if sales proceeds of a flat are $600,000, the home owner has to pay a 10 per cent levy of $60,000 if he chooses another new HDB flat. If the levy is capped at $40,000, he saves $20,000.

Similarly, if net cash proceeds are just $83,000, having to pay a 10 per cent levy of $8,300 is more bearable than having to fork out $40,000.

Michael Chua


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