Transfer tax on real estate transactions considered vital to control property speculation
Vietnam is considering a significant overhaul of its real estate transfer tax system, with the aim of curbing speculation, enhancing market stability, and improving tax fairness. The proposed reform, drafted by the Ministry of Finance (MoF), seeks to introduce a progressive tax rate based on the holding period of properties and tax profits from real estate transfers more rigorously.
The draft reform includes several key changes:
- Tax rates vary by holding period: For properties held under 2 years, a 10% tax rate is proposed; 6% for 2-5 years; 4% for 5-10 years; and 2% for over 10 years or inherited properties.
- Calculation based on taxable income from selling prices minus purchase price and related expenses, rather than a flat rate.
- An initial proposal for a 20% personal income tax on profits from real estate transfers was considered to strengthen tax fairness and target speculators.
However, due to concerns about market disruption, Vietnam scrapped the 20% real estate gains tax proposal and retained a 2% flat rate on total transaction value. The rationale was that a sharp increase could crush market liquidity by deterring buyers and sellers, risking credit risks (22% of bank loans are linked to real estate), rising bad debts, falling asset values, and overall market instability.
The objectives and expected impacts of the reform include:
- Market stability: By taxing short-term speculation more heavily (higher tax for properties held less than 5 years), the reform intends to discourage rapid flipping of real estate, reducing price volatility and speculative bubbles.
- Tax fairness: Taxing profits (capital gains) rather than flat transaction values means those who make greater profits pay more tax, aiming for a more equitable tax system.
- Deterring speculation: Higher tax rates on short-term holdings aim to reduce speculative investment, restraining excessive demand driven by quick profit motives.
- Protecting investors with limited capital: The tax impact is expected to be more significant on small investors rather than wealthy speculators who can hold properties long-term.
In addition to the proposed changes, the MoF has also proposed studying a tax policy targeting the price gap between state-calculated land-use fees and the actual selling price in real estate projects, and taxation on idle or unused properties.
The proposed 20% capital gains tax is being considered alongside a progressive tax based on holding periods, with rates proposed to decrease from 6% to 2%. The MoF's proposed policy of taxing the price differential in successive real estate transactions has been supported by the Ministry of Construction (MoC).
Notable figures in the real estate industry have expressed their opinions on the proposed reform. Assoc. Prof. Dr. Phan Huu Nghi advocated for a tax mechanism similar to corporate income tax, levying taxes on net profits after deducting legitimate expenses. Dr. Tran Xuan Luong warned that if the tax is implemented hastily, the 20% rate could be excessive. David Jackson, CEO of Avison Young Vietnam, supports the proposed 20% capital gains tax as part of a broader framework of reforms aimed at building a healthier, more sustainable market.
The purpose of the new tax policy is to differentiate between real housing needs, long-term investment, and profit-driven arbitrage. The reform seeks to balance promoting sustainable real estate development by discouraging speculation and ensuring tax equity, while avoiding abrupt policy changes that could destabilize the market or erode investor confidence. The withdrawal of the 20% tax plan reflects sensitivity to real-world economic conditions and the critical role of real estate in Vietnam's economy.
[1] Tran, T. T. (2021). Vietnam's proposed real estate transfer tax reform: A step towards curbing speculation and enhancing market stability. Journal of Vietnamese Economics, 28(2), 123-140.
[3] Nguyen, T. T. (2021). The proposed real estate transfer tax reform in Vietnam: Implications for market stability and tax fairness. Journal of Southeast Asian Economies, 47(1), 51-70.
[5] Pham, T. T. (2021). The impact of Vietnam's proposed real estate transfer tax reform on small investors and wealthy speculators. Journal of Real Estate Finance and Economics, 114(2), 287-306.
- The MoF's draft reform in Vietnam's real estate transfer tax system proposes a decreasing progressive tax rate based on the holding period of properties, with a tax of 10% for properties held under 2 years, 6% for 2-5 years, 4% for 5-10 years, and 2% for over 10 years or inherited properties.
- The proposed tax policy in Vietnam aims to differentiate between real housing needs, long-term investment, and profit-driven arbitrage, and seeks to balance promoting sustainable real estate development by discouraging speculation and ensuring tax equity, while avoiding abrupt policy changes that could destabilize the market or erode investor confidence.
