According to Minister for National Development, Lawrence Wong, there were 7900 second-timer households who paid the required resale levy when buying second subsidized flat from the Housing and Development Board (HDB) from 2010 to 2015. Notwithstanding the figure, I suspect many people are not aware of the lurking dangers of deferred resale levy rule.
Not knowing the rule can cost you an arm or leg because without the knowledge, you are unable to strategize and do proper asset planning. In this article, I will share with readers how to exploit the deferred resale levy rule with the goal of building wealth with property.
Please note that I am not advocating anything illegal or sleazy. No, nothing of that sort. In fact, this information that you are going to read is something that you are not likely to find in most personal finance blogs. I learnt about this relatively unknown rule in the course of purchasing my third property and hope to share this really useful information with readers. Read on if you are interested.
Second timer applicants
Most Singaporeans are aware that they are given two chances to purchase new subsidized flat from HDB. Hence, Singaporean couples can apply twice for Build-to-Order (BTO), Design, Build and Sell Scheme (DBSS) or Executive Condominium. In essence, an eligible Singapore Citizen is allowed to buy these properties twice in total, BUT not twice per type of property.
What this means is that a Singaporean can buy BTO and then DBSS or EC. However, he is not eligible to buy BTO and then BTO. In addition, if you have already bought 2 such properties, you will not be eligible to apply for an EC or be listed as an essential occupier in an application. These information is stated in the HDB website at here.
You need to pay a resale levy when you dispose of your subsidised flat and then buy a second subsidised flat from HDB. The amount to be paid is based on the type of your first subsidized flat and most importantly, the date of the sale of the first flat.
After 3 March 2006: Households that sold their flats after 3 March 2006 need to pay resale levy ranging from $15,000 to $55,000.
Before 3 March 2006: This is where things become very scary because graded resale levy applies. Households that sold their flats before 3 March 2006 need to pay resale levy ranging from 10% to 25% of resale price of the sold flat, or 90% of its market valuation, whichever was higher.
It is very important to know the above because it would impact the amount you need to cough up if you chose to go for deferred resale levy. If you are discerning enough, the amount of resale levy to be paid could even go up to a few hundred thousand dollars for graded resale levy because of the compound interests.
Deferred Resale Levy
You can always avoid paying resale levy through several ways. The most straightforward approach is buying private property or resale HDB flat for your second property.
However, do note that if you did not pay the resale levy upon the purchase of your second property, you are considered to defer the payment until you purchase another HDB flat. The interest is at a prevailing rate of 5% per annum. So, the best way to avoid paying the resale levy is not to buy a second subsidized flat. As the saying goes, don’t look back in life.
For Executive Condominium, things are a little bit more complicated. If you disposed of your subsidised flat and then buy an EC from a developer where the land sale was launched on or after 9 December 2013, including those where tenders were not closed, i.e. Westwood Avenue, Canberra Drive and Anchorvale Crescent, then you must pay resale levy.
You need not pay a resale levy if you are buying EC from a developer where the land sale was launched before 9 December 2013. This ruling came about during the slew of cooling measure in 2013 when the government addressed the gap in the housing regulations. Previously, new EC owners did not have to pay the resale levy, hence there was a time when ECs were selling like hotcakes as Singaporeans took advantage of this loophole in the system.
The most important thing about resale levy is the payment timeline. For “normal” resale levy, the resale levy can be deducted from the sale proceeds upon the sale of the first subsidised flat. Any shortfall to be paid in cash. However, for deferred resale levy, the resale levy must be paid in cash! Read this in HDB website.
Trap and pitfalls
The issue with deferred resale levy is that it could be a massive landmine that could be potentially explosive if you are not careful with it. There are upgraders who took grants for their first HDB flat and then subsequently purchased resale HDB flat from the market. For this group of people, they are entitled to buy a second subsidized property from HDB but they must be wary of the deferred resale levy.
Just imagine this. The annual interest rate for the deferred resale levy is a whopping 5%. Compound this interest over ten or more years, the amount could be huge. Make no mistake, the clock starts from the sale of the first property. Most owners overlooked that they have taken housing grants for their first property and miscalculated the financing costs when planning for their future asset purchases. The mistake could be financially fatal.
The very scary part is when your property is subject to the graded resale levy, which is based on the percentage of the sale of your first property and not a fixed quantum. But that is not all, the biggest nightmare is the payment of the deferred resale levy. It must be paid in cash and not from the sale proceed of your second property. How many Singaporeans are that cash-rich to pay the deferred resale levy in cash?
My family wealth journey
I came to know of this deferred resale levy in the course of my family wealth journey. We were planning for the purchase of our third family house when a very experienced real estate agent highlighted this to us. After doing some research on HDB website, I verified that what she revealed was accurate.
She also revealed that there were many Singaporeans who fell into this deferred resale levy trap and had to pay expensive lessons. Because of what I learned, my family decided to purchase The Terrace Executive Condominium, which was one of the last few EC exempted from resale levy. I was grateful to the real estate agent for her advice. Otherwise, I would have to pay an estimated $45,000 of deferred resale levy.
Whilst I agree with government policy on the need for resale levy to ensure level-playing field for all Singaporeans, there is really no need to slap 5% interest rate for deferred resale levy. After all, the prevailing interest rate for the past 5 years had been 1 to 2% for most housing loans in the market. And what is the rationale to pay cash for deferred resale levy? How many Singaporeans can fork out that sort of amount in cash?
I am sharing this with my readers so that you can avoid such pitfalls in your wealth building journey. Indeed, property can be your key to financial freedom but you must be wary of the various potential traps that may turn out to be financially fatal. Hope you find this article useful. If so, please subscribe to my blog for free. I am planning to share my articles on how to build wealth with property going forward and hope that you can be part of my journey.
Read my other articles on property-related investments:
- Understanding Joint Tenancy and Tenancy-in-Common
- 99-to-1 Tenancy-in-Common
- Frightening HDB rules
- Managing your CPF proceeds from the sale of your HDB to build wealth
- HDB: The thin fine line between Joint Tenancy and Tenancy-in-Common
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