Property Speculation & Taxes

I was reading with interest the ongoing debate regarding the proposed IRAS legislation with regards to property/real estate transactions that is going into effect January 2010. Basically, the proposed legislation lays out (in effect) that if a person were to have transacted or sold more than 1 property in the prior 4 years, any subsequent transaction is subject to taxation. So why is this interesting, you ask? Simple...the legislation itself is not very sexy but the public reaction though is one brings interest to me, especially as a foreigner from North America.

In essence, the public sentiment in Singapore is one that is divided into 2 camps. On one side (in the red corner) are the supporters of the legislation who applaud the move as they view that such legislation could reduce the speculation and stabilize/provide purchasing opportunities for genuine purchasers who are buying the property to stay in. In the Blue corner though, we find the opposers of the legislation who have voiced concerns noting that the legislation is not clear and would damage the recovering property market in Singapore, i.e. noting that it would reduce the number of property transactions which contributes to the economy. Members of the blue corner though seem to suggest that there must be clarity in the law as they do not understand what would be considered a speculator and subject to taxes. Interesting arguments put forth by both sides though. Let's take a closer look....

As a quick background to my discussion, I shall clarify that my comparison is based on my experience as a lawyer in North America (Canada & US) and is only my personal opinion. In North America, we have an interesting provision with regards to property. One of the key features is Capital Gains taxation. Basically, the provision states that any property that is sold by the seller and not a primary residence (i.e. the seller does not stay there on a regular basis) is subject to Capital Gains tax upon sale. In the US though, some states provide a cap on the maximum appreciation that a seller can have tax-free which means that even if the residence were a primary residence, a gain above a certain exempt amount is subject to taxation. Also, in both North American countries, provisions are made for tax deductions for interest in order to encourage home ownership; in the US, the interest paid on the mortgage for the primary residence is tax deductible, and in Canada, the interest on the mortgage for property other than the primary residence is tax deductible. Both countries though define earned income for taxation purposes as income derived from any means which includes legitimate and illegitimate purposes; simply put, this includes rental income from property etc.

So why is this background important? Essentially, I do not understand the hoo-hah raised by the people who oppose the IRAS legislation (except that they are afraid that their precious gains are subject to tax). Basically, opposers of the legislation who claim that the legislation is unclear as to who is a speculator should stop being babies about it and stop whining about what they have done. Common sense states that if you are buying a property for purposes other than to be your primary residence, you are speculating to an extent. Why? Simple. How many houses does one need in Singapore? Singapore is basically 42km east to west...can one who buys multiple properties say with a straight face that you are buying one property in the north, one in the south, one in the east and one in the west so that you have a vacation home in different parts of the country? Essentially, why would you buy so many properties? This leads me to the simple answer that one property is a primary residence and the rest are investment.

Now, investments can come in many forms. Rental income is also considered investment. When you rent a property out, the amount that you charge goes into your pocket which frees up other cash for other purposes; essentially, this is a gain because you have earned cash that you otherwise would not have. Another view on this investment relates to sale of the property. When you have multiple properties and you start selling the properties at a gain (you will not sell when its at a loss unless necessary - in which case, the legislation has no effect), you essentially earn income from the sale. As such, shouldn't this be considered earned income for the purposes of taxation because you have derived income which you did not have before? We get taxed on income from employers so why should there be an exception to the sale of property?

Apologies for the digression. This leads me back to my issue on who is a speculator. Basically, by common sense, the person who holds more than one property (primary residence) should be deemed a speculator because you are holding the property not for personal consumption but waiting for a good time to sell the property. Please...for those who are saying that eventually you may consider moving into the property, re-think your excuse because the only reason you would sell off your properties is because the market is hot and not because you do not need it anymore!...who are you kidding? As such, isn't the definition of who a speculator is straight forward? Essentially, what the ranting is all about seems to come from the camp who are speculating and now wish to find a way to excuse their actions.

The result of speculation in the property market is rampant right now. As an example, I visited a recent launch of a condo on the first day and was advised that all the units were sold which fit my budget (which by the way, was enough to purchase a 2 bedroom unit there). Also, the most amusing things was the agent was telling me how she bought a 1 bedroom apartment there and it was great for rental income and the price would appreciate. Now wait a minute...isn't this person speculating and affecting what a genuine buyer like myself can afford when I am purchasing a place so that I may settle in Singapore with my wife-to-be? Why should I pay for the gains of a speculator who is out to make a quick buck at my expense? I work hard for my earned income and get taxed, shouldn't the speculator be subject to the same tax or wait a minute...is it because the speculator has more money and therefore can keep more of it? Hmmm....

Alternatively, some may suggest that if I do not have the money, why not buy a HDB? FYI - Property prices for HDB have increased in proportion to the private property market. Again, who has contributed to this situation. Surprise...surprise...speculation! Also, foreigners are ineligible for HDB properties so how can this be an option for foreigners wanting to establish themselves here for the long term (Note: Not all foreigners here have expat packages eh!).

Air, food and shelter are key requirements for people and the rising cost of housing in Singapore is an issue that must be tackled. It is true that people are leaving the country as the cost of living is skyrocketing. Property and space is limited here but the rampant speculation is not helping genuine buyers establish themselves. I am not advocating that the new legislation is correct but I do view the legislation as a step towards equalizing and stabilizing the market by preventing an overabundance of fluctuation in the market, enabling genuine buyers to purchase a decent home at a decent price instead of being subject to the premiums imposed by the speculators.

I am taxed on my income so why shouldn't the speculators/investors be taxed on theirs? This keeps me pondering as to why the big ruckus except that I believe the speculators are now worried that their pockets will be hit. Housing needs to be affordable as it is one of the essentials of life and should not be subject to the whims of an elite who wants to make gains and keep it at the expense of the rest of us...this keeps me thinking....