【Property Tax Calculation】How to calculate property tax? Personal income tax, home loan interest, and property tax allowances are all answered!

【Property Tax Calculation】How to calculate property tax? Personal income tax, home loan interest, and property tax allowances are all answered!

In this article, we will introduce property tax and provisional property tax, which are the main concerns of property owners, explain the tax details related to rental properties in Hong Kong, and show you how to calculate property tax with examples. You may also have other questions, such as is there a difference between owner-occupied/rental property tax? What about personal income tax and home loan interest? Are rates and management fees tax deductible?

Back to the tax return Q&A list

Confident of approaching the tougher ones? Read the advanced tax law and court cases

Table of Contents

What is property tax?

Learn about property tax payment dates first

What is the property tax rate in Hong Kong? How to calculate property tax?

Examples of property tax calculation?

“Property Tax” and “Personal Assessment”?

Property tax vs. personal assessment:

Home loan interest deduction? Is there an interest deduction for owner-occupied/rental units?

For prospective property investors and homeowners alike, read on for more information on property tax calculations or contact us for property tax inquiries:

What is property tax?

According to the Hong Kong Inland Revenue Ordinance, Chapter 112, Section 5B “Collection of Property Tax”, property tax (property tax or real estate tax) may be payable when a property owner owns a property. For each tax year, the amount of property tax is calculated based on the net assessable value of the property and the standard tax rate. All rental income (i.e. rent for the whole year) is calculated as the assessable value.

The taxable year begins on April 1 of each year and ends on March 31 of the following year. Basically, in short, property tax is a “20% discount” on the total rental income after deducting bad debts and rates (as a standard property tax allowance for repairs and expenses), and the balance is the net assessable value.

Since the landlord is entitled to a standard property tax allowance of 20%, there is no further deduction for actual expenses. Ground rent, building renovation costs, rent collection fees, building management fees, insurance premiums and mortgage interest are not deductible. Only those homeowners who are eligible and have elected the personal income tax method can claim a deduction for mortgage interest paid on the purchase of a property for personal income tax purposes (home loan interest is tax deductible).

Know the date of payment of property tax first

Before calculating your property tax, you can check the tax payment dates on the notice of assessment issued by the Inland Revenue Department. The general tax year is from April 1 of each year to March 31 of the following year.

You should pay the tax listed on the notice of assessment on or before the tax payment date unless you have not filed an objection or have applied for a holdover of the provisional tax and have received the approved tax amount.

What is the property tax rate in Hong Kong? How is property tax calculated?

The Hong Kong property tax rate, hereinafter referred to as “property tax”, is calculated on the basis of the “net assessable value” of the rental property for the year of assessment at the “standard rate”, including the standard property tax allowances for repairs and expenses.

The formula for calculating property tax on the net assessable value of property rented out is as follows:

[ A ] Rental income

[ B ] Irrecoverable rent

[C] Taxable value (A-B)

[ D] Rates paid by the landlord

[E] (C-D)

[ F] Standard property tax allowance for repairs and expenses (E x 20%)

  Net assessable value (E-F)

Due to the different conditions of the properties, the repair costs may vary from case to case. To simplify the calculation process, the IRD will automatically deduct 20% of the landlord’s net rental income, including all miscellaneous expenses arising from the rental, as the standard property tax allowance for repairs and expenses, and the landlord is not required to provide proof of the actual expenses to the IRD.

In addition, if a tenant is in arrears, the landlord will still be required to include the arrears of rental income in the property tax return; in the unlikely event that it is determined that the rent cannot be recovered, the landlord may apply for a deduction from the rental income.

What are the deductible items in the property tax calculation? Can management fees and renovation costs be deducted?

The following items are deductible in the calculation of property tax:

Rates paid by the landlord;

irrecoverable rents and other income related to the property (if subsequently recovered, they must be reported in the year of assessment in which they are collected); and

20% of the assessed value of the property as a statutory allowance for repairs and expenses. This fixed allowance is granted regardless of the actual expenses incurred and is calculated by deducting from the property’s income the rates paid by the owner and any unrecoverable rent.

The landlord cannot deduct any expenses other than those listed above. Although it is generally stated in the lease that the landlord is responsible for the management fee, the management fee is not deductible and other expenses paid by the landlord, such as ground rent, management fees, renovation fees, maintenance fees, rent collection expenses, commissions and insurance premiums, are not deductible.

What was the property tax rate in Hong Kong in previous years?

Checking the Hong Kong property tax rates, the rates for 2008/09 and onwards are 15% of the net assessable value, please refer to the table below:

Year of assessment Tax rate

2008/09 and onwards 15%

2004/05 to 2007/08 16%

2003/04 15.5%

2002/03 15%

Example of property tax calculation?

Assuming the following example, the monthly rent for the property is $10,000 for the year of assessment 2020/21 and the rates are borne by the tenant.

Final tax assessment for 2021/22 and provisional property tax for 2022/23:

Assessable Value (12 months rent) $120,000

Less: 20% property tax allowance for repairs and expenses $24,000

Net assessable value $96,000

Property tax at 15% for 2021/22 $14,400

Add: Provisional tax for 2022/23 $14,400

(Based on net assessable value for 2021/22 and standard tax rate of 15%) 

Total tax payable $28,800

“Property tax” and “personal income tax”?

The terminology of “property tax” and “personal income tax” may be confusing to first-time tax filers. Basically, “property tax” and “personal income tax” are the two bases of taxation available to homeowners, and you can choose either one as the basis for calculating your annual tax liability.

In short, the calculation is very similar, except that property tax does not allow for the deduction of interest expenses, and the differences are discussed in more detail in the next paragraph. However, property owners need not worry because the IRS will automatically calculate which calculation is most beneficial to the property owner.

Property tax vs. personal income tax:

A property owner may ask, “How do I choose between property tax and personal income tax? Although theoretically the IRS will automatically choose the more favorable basis, if a property owner wants to understand more about the two calculation methods, he or she can refer to the following chart to compare the level of benefits and present an intuitive comparison.

Property Tax vs. Personal Assessment, Property Tax Calculation, Comparison of Deductible Items:

            Property tax Personal income tax

Tax basis Annual rental income Annual rental income

Deductible items – rates – non-recoverable rent – rates – non-recoverable rent

After deducting the above items, the balance is calculated as X 80% and then taxed at 15%.    After deducting the above items, X 80% of the balance is calculated and the remaining amount is deducted from the mortgage interest expense (no term limit) and the tax payable is calculated at a progressive rate.

The chart above shows that the landlord must deduct the rates expense and bad rent from the rental income due or received for the tax year and then multiply it by 80%.

If the property tax calculation is chosen, this figure can be multiplied by the standard tax rate of 15%;

If you choose personal income tax, you can deduct the mortgage interest expense and then calculate the tax due based on the progressive rate of salaries tax.

Generally, personal income tax is more cost effective than property tax because you can deduct your mortgage interest expenses and other deductions and use the progressive tax rate to calculate your tax liability. However, it depends on the individual’s income level, rent level, interest expenses and available deductions.

Home loan interest deduction? Is there an interest deduction for owner-occupied/rental units?

The “home loan interest deduction” is a tax deduction for mortgage interest on owner-occupied residences only. For owner-occupied property, the deduction is available on either gross income for payroll tax purposes or gross income for personal income tax purposes, even for those paying standard tax rates.

Owners can claim the Home Loan Interest Deduction for owner-occupied units up to $100,000 for a maximum of 20 years.

If the property is a rental property and interest is paid on the mortgage, the deduction is also available. However, if the interest on the rental property is deductible, the taxpayer must be taxed under personal income tax. If the property is owned by the owner for rental purposes and is taxed under the personal assessment method, the interest is deductible from the net assessable value of the property (up to a limit of the net assessable value of the property) and there is no limit on the number of years, unlike the 20-year limit for the Home Loan Interest Deduction.

“The requirements for the Home Loan Interest Deduction are as follows:

Must be the owner of the residence (i.e. sole owner, joint tenant or tenant-in-common);

The residence must be located in Hong Kong;

the dwelling was used wholly or partly as a place of residence during the year of assessment (if only partly used as a place of residence, an appropriate deduction must be made for the home loan interest deducted)

the interest-bearing loan must be used for the purchase of the dwelling

the loan is secured by a mortgage or charge on the dwelling or other Hong Kong property

The lender must be a legitimate lender.

The above information is for reference only. If you have any questions regarding tax filing, accounting, or property tax, we welcome your inquiries.

Similar Posts

Leave a Reply

Your email address will not be published. Required fields are marked *