BEIJING - To stem surging housing prices and curb speculation, China has recently issued a new policy that enables local governments to impose a 20% tax on profits earned from the sale of a second home.
This is a huge hike from the current 1-2% tax. The move immediately triggered panic among the affluent class -- and almost just as quickly, creative ways to avoid the tax. The most popular method? Well, get a divorce.
Chen Xu, a Beijing lawyer, says that he has been receiving more and more phone calls about the feasibility of getting divorced without actually leaving your spouse and home, that is, faking a divorce.
Mrs. Ma is one of the Beijing residents anxious about whether or not she should get divorced before the new tax rules come into effect. Mrs. Ma and her husband own two apartments together, but they want to sell one of the apartments to buy a new one in a better school district. The prices of the two apartments they bought quite cheaply more than five years ago have increased four and five-fold, which means they would pay a huge amount of property tax on them. However, if the couple gets “divorced,” they could each own one apartment and avoid paying the 20% capital gains tax.
Fake divorces are nothing new in China – the phenomenon started appearing a few years ago when some Chinese cities introduced measures to restrict home ownership to one per couple. "Before it was only the buyers who needed to get divorced whereas now it applies also to the couples wanting to sell," said Mrs. Ma.
A million sham divorces
Professor Xie Baisan from Fudan University says the phenomenon first appeared in 2009, when couples tried to avoid paying much higher interest rates on mortgages taken out for the purchase of second homes. He believes the new housing policy could lead to one million fake divorces in China.
Most often these couples have a proviso in their divorce agreement stating that they still live together. Some will even remarry once the mortgage has been taken out or the property tax has been paid.
Professor Xie understands why getting a fake divorce is so popular. "The housing price in Shanghai’s good school district has gone up eight to tenfold in the last decade. Instead of paying 70 Yuan ($11) to get divorced and another 70 Yuan to be remarried, you would be insane to want to pay hundreds of thousands in property tax,” he says.
Chen Xu doesn’t agree with Professor Xie. He says that getting a fake divorce involves great legal risks. If the couple does end up separating for real, one of the spouses could end up losing his or her share of the jointly owned assets. Also, he says, the act of divorce can be emotionally and psychologically damaging.
According to Chen Xu, the government needs to review its housing policy to curb the phenomenon. For instance, he says, couples who sell their second homes to improve their primary residences should not be punished.
Shi Jie, a lawyer who is also a member of the China’s consultative assembly, the CPPCC, believes that if there are no penalties for breaking the law – i.e. getting a fake divorce – then the law will stop being effective. He says such behavior should be punished or that China’s credit system should be adapted to this new reality. In effect, poor credit ratings could be implemented for people who commit “policy divorces,” and this rating could impact employment, loans and medical care.