Understanding Hong Kong’s Property Tax Framework

Hong Kong’s property tax system operates on a territorial basis, meaning only rental income derived from properties physically located within Hong Kong’s boundaries is subject to taxation. Property tax is levied at a standard rate of 15% on the net assessable value of land and buildings, excluding government and consular properties.

The Inland Revenue Department (IRD) requires all property owners who receive rental income to report this income annually. If you are the sole owner, rental income must be disclosed in the Tax Return – Individuals (BIR60). For jointly owned or co-owned properties, property owners must file either the Property Tax Return – Property Owned or Co-owned by Individuals (BIR57) or Property Tax Return – Corporations and Associations of Individuals (BIR58).

Who Must Report Rental Income

Under the Inland Revenue Ordinance, every property owner, joint owner, or owner in common is responsible for reporting rental income and paying property tax. This obligation applies regardless of ownership structure. Each owner is treated as if they are the sole owner for reporting and payment purposes.

How Net Assessable Value is Calculated

Understanding the net assessable value (NAV) calculation is crucial for accurate property tax reporting and optimization. The calculation follows a systematic approach:

Step 1: Determine Assessable Value

The assessable value includes all consideration payable to the owner for the right to use the property during the year of assessment. This encompasses:

• Monthly rental income
• Lump sum premiums or key money
• Non-refundable rental deposits
• Service charges and management fees paid to the owner
• Payment for the right of use under license agreements
• Owner’s expenditures (such as repairs) borne by the tenant

Step 2: Deduct Allowable Expenses

Hong Kong property tax law permits only two specific deductions before applying the standard 20% allowance:

1. Rates paid by the owner: Only rates that the owner has agreed to pay and actually paid during the year are deductible. Do not claim deductions for rates already offset by government rates concessions. Note that government rent is not deductible and should not be included in your rates claim.
2. Irrecoverable rent: Only rent confirmed to be irrecoverable during the year of assessment is deductible. Rent is considered irrecoverable when the tenant has vacated, all recovery attempts have failed, and collection is no longer possible. Unpaid rent from tenants still occupying the property is considered rent receivable and must be included as rental income.

Step 3: Apply the 20% Standard Allowance

After deducting rates and irrecoverable rent, a standard 20% allowance is automatically applied to cover repairs and outgoings. This is a statutory deduction that cannot be adjusted based on actual expenses incurred.

Calculation Formula

Net Assessable Value = (Assessable Value – Rates Paid by Owner – Irrecoverable Rent) × 80%
Property Tax Payable = Net Assessable Value × 15%

Practical Example

Consider a property owner who receives HKD 10,400 per month in rent for 12 months, where the tenant is responsible for paying rates:

• Assessable Value: HKD 10,400 × 12 = HKD 124,800
• Less: Rates paid by owner: HKD 0 (tenant pays)
• Less: Irrecoverable rent: HKD 0
• Subtotal: HKD 124,800
• Less: 20% allowance: HKD 124,800 × 20% = HKD 24,960
• Net Assessable Value: HKD 99,840
• Property Tax Payable: HKD 99,840 × 15% = HKD 14,976

Understanding Deductible vs. Non-Deductible Expenses

A common source of confusion for property owners is which expenses qualify for deduction. The following table clarifies this distinction:

Important Note: Mortgage interest is not deductible under property tax. However, it may be deductible if you elect for Personal Assessment (discussed below).

Step-by-Step Guide to Optimizing Rental Income Reporting

Step 1: Maintain Comprehensive Records

Proper documentation is essential for accurate reporting and maximizing legitimate deductions:

• Keep all tenancy agreements and license agreements
• Retain receipts for rates payments
• Document all rental income received, including deposits and premiums
• Maintain correspondence regarding irrecoverable rent and collection attempts
• Record the dates and amounts of all payments received and expenses paid

Step 2: Identify All Components of Assessable Value

Ensure you include all forms of consideration received from tenants:

• Regular monthly or periodic rent payments
• One-time premium payments or key money
• Non-refundable portions of security deposits
• Service charges or management fees you receive as the landlord
• Any expenses normally borne by you that the tenant has agreed to pay

Step 3: Claim Legitimate Deductions

Rates Paid by Owner: If your tenancy agreement stipulates that you (the owner) are responsible for rates, ensure you claim this deduction. Verify that you have paid the rates and have not benefited from government rates concessions for the amounts claimed.

Irrecoverable Rent: If a tenant defaults and you determine the rent is irrecoverable, document your collection efforts thoroughly. The rent must be confirmed as irrecoverable during the year of assessment to qualify for deduction. Remember that if you later recover any portion of the previously written-off rent, you must report it as rental income in the year of recovery.

Step 4: Consider Personal Assessment Election

Personal Assessment is an alternative tax assessment method that may reduce your overall tax liability. This option allows you to aggregate income from salaries tax, profits tax, and property tax into a single assessment.

Key Benefits of Personal Assessment:

• Income is taxed at progressive rates (2% to 17% for 2024/25 and 2025/26) instead of the flat 15% property tax rate
• You can claim personal allowances for dependent family members
• Mortgage interest on your rental property becomes deductible (a major advantage not available under standard property tax)
• Approved charitable donations can be deducted
• Business losses can be offset against rental income

Eligibility Requirements:

From the 2018/19 year of assessment onwards, to elect for Personal Assessment you must be:

• Either ordinarily resident in Hong Kong or a temporary resident
• If married, you or your spouse must meet the residency requirement, and both must have income assessable under the Inland Revenue Ordinance
• Individuals aged 18 or above can elect separately from their spouse, provided they meet residency requirements

Who Benefits Most from Personal Assessment:

• Property owners with mortgage interest expenses on rental properties
• Individuals with lower total income who would fall into lower progressive tax brackets
• Those with multiple income sources including business losses that can offset rental income
• Property owners who can claim substantial personal allowances

When Personal Assessment May Not Be Advantageous:

High-income earners may not benefit from Personal Assessment because the progressive tax rates can reach 17%, which is higher than the standard 15% property tax rate. Additionally, the two-tiered standard rates (15% on the first HKD 5 million of net income and 16% on the remainder) may result in a higher tax burden for large income taxpayers.

Step 5: Understand Filing Deadlines and Provisional Tax

Filing Deadlines:

• Tax Return – Individuals (BIR60): Typically due one month from the date of issue (automatic two-week extension for e-filing)
• Property Tax Return (BIR57/BIR58): Due within one month from the date of issuance (two-week extension for online submission if eligible)

Provisional Tax:

Hong Kong operates a provisional tax system. Your property tax assessment will include both:

• Final tax for the previous year of assessment (based on actual rental income)
• Provisional tax for the current year of assessment (estimated based on previous year’s income)

At year-end, the IRD assesses your actual income and reconciles it against provisional tax paid. Any overpayment is refunded or credited against future tax liabilities, while underpayments must be settled.

Step 6: Report Common Area Rental Income

If any common areas of a building you own are leased out, the rental income derived is chargeable to property tax. All owners are jointly responsible for reporting this income and paying the tax. If you have not received a tax return relating to common areas that are being leased, you are required to notify the IRD in writing.

Step 7: Take Advantage of Tax Relief Measures

The Hong Kong government periodically offers tax relief measures. For the 2024/25 year of assessment, 100% of final tax payable under profits tax, salaries tax, and tax under personal assessment is waived, subject to a ceiling of HKD 1,500 per case. Stay informed about current relief measures that may apply to your situation.

Common Pitfalls to Avoid

1. Incorrectly Classifying Rent as Irrecoverable

Rent can only be claimed as irrecoverable when collection is genuinely impossible. Rent owed by tenants still occupying the property must be reported as assessable income, even if payment is overdue.

2. Claiming Non-Deductible Expenses

Many property owners attempt to deduct actual repair costs, management fees, or mortgage interest under standard property tax assessment. These expenses are not deductible under property tax—only the 20% standard allowance applies.

3. Confusing Government Rent with Rates

Rates and government rent are separate charges. Only rates paid by the owner are deductible for property tax purposes. Government rent is never deductible.

4. Failing to Report Non-Rental Consideration

Key money, premiums, non-refundable deposits, and tenant-paid owner expenses must all be included in assessable value. Omitting these amounts constitutes underreporting.

5. Not Considering Personal Assessment

Many property owners automatically pay property tax without evaluating whether Personal Assessment would reduce their tax burden. If you have mortgage interest or qualify for personal allowances, Personal Assessment may offer significant savings.

6. Missing Filing Deadlines

Late filing can result in penalties and interest charges. Mark filing deadlines clearly and consider using e-filing for the automatic two-week extension.

Special Considerations for Different Property Types

Residential Properties

Standard property tax rules apply. Consider whether Personal Assessment would be beneficial, especially if you have a mortgage on the rental property.

Commercial Properties

Commercial property rentals follow the same property tax framework. Service charges and management fees paid to the owner must be included in assessable value.

Car Parking Spaces

Rental income from car parking spaces is subject to property tax under the same rules as other immovable property.

Jointly Owned Properties

Each joint owner or owner in common is responsible for reporting their share of rental income and paying property tax as if they were the sole owner. Use the appropriate BIR57 or BIR58 form for jointly owned properties.

How to Make a Personal Assessment Election

If you determine that Personal Assessment would be advantageous, the election process is straightforward:

1. Complete the relevant section in your Tax Return – Individuals (BIR60)
2. The election must be made in writing
3. If you are married and have elected for joint assessment for salaries tax purposes, the Personal Assessment election must be made jointly by both spouses
4. From 2018/19 onwards, married persons aged 18 or above can elect separately from their spouse if they meet residency requirements

The IRD will then calculate your tax liability under both standard assessment and Personal Assessment, and you will be charged the lower amount.

Record Keeping Best Practices

Maintaining organized records throughout the year simplifies tax filing and ensures you can substantiate all claimed deductions:

• Rental income records: Bank statements, receipt books, tenant payment records
• Rates payment records: Official rates demand notes and payment receipts
• Tenancy documentation: Signed tenancy agreements, license agreements, renewal notices
• Irrecoverable rent documentation: Correspondence with tenants, legal letters, evidence of collection attempts, court documents if applicable
• Mortgage documentation: Loan statements showing interest paid (if considering Personal Assessment)
• Personal allowance documentation: Dependent certificates, charitable donation receipts (if electing Personal Assessment)

Retain all records for at least seven years, as the IRD may request documentation during audits or inquiries.