Common Misconceptions About Hong Kong’s Property Tax on Rental Income Debunked

Hong Kong’s property tax system is relatively straightforward, yet several persistent misconceptions continue to confuse property owners and investors. Understanding the facts can help you comply with tax obligations and potentially reduce your tax liability through proper planning. Let’s address the most common myths with accurate, fact-checked information.

Understanding the Scope of Hong Kong Property Tax

Property tax in Hong Kong is levied specifically on income arising from the letting of immovable property located in Hong Kong. The tax is payable by the owner(s) at the standard rate of 15% on the “net assessable value” of the property. It’s crucial to understand that property tax is distinct from other property-related charges and taxes.

The Territorial Principle

Property tax adopts the territorial principle and is levied exclusively on properties located in Hong Kong. This means that the owner’s residency status, nationality, or foreign citizenship is completely irrelevant to property tax obligations. Whether you are a Hong Kong permanent resident, a foreign national, or a non-resident, if you own property in Hong Kong that generates rental income, you are subject to property tax.

Misconception #1: Property Tax, Stamp Duty, and Profits Tax Are the Same Thing

The Key Differences

Property Tax is an annual tax on rental income received from letting property in Hong Kong. It is charged at 15% of the net assessable value (gross rental income minus rates paid and a 20% statutory allowance). This tax applies regardless of whether the owner is an individual or corporation, though corporations typically pay under the profits tax regime instead.

Stamp Duty is a one-time transactional tax charged on instruments effecting property transactions, stock transactions, and property leases. Effective from February 26, 2025, ad valorem stamp duty on property transfers is charged at progressive rates ranging from HKD 100 (for properties up to HKD 4 million) to 4.25% (for properties exceeding HKD 20 million). This is a transaction-based tax, not an income tax.

Profits Tax is levied on assessable profits arising in or derived from Hong Kong from any trade, profession, or business. For property, this typically applies to corporations receiving rental income or individuals engaged in property trading as a business. The profits tax rate is 16.5% for corporations and 15% for unincorporated businesses. Notably, there is no capital gains tax in Hong Kong, but profits from property trading may be subject to profits tax if the activity constitutes a business or trading adventure.

Special Note for Corporate Property Owners

Rental income derived by a corporation from a Hong Kong property is subject to profits tax, not property tax. However, corporations that are subject to profits tax may apply for an exemption from property tax to avoid double taxation. In cases where property tax has already been paid, the amount can be set off against profits tax payable, and any excess will be refunded.

Misconception #2: You Can Claim Actual Expenses Instead of the 20% Allowance

The Truth About Deductions

This is perhaps the most misunderstood aspect of Hong Kong property tax. The law provides a flat 20% statutory allowance for repairs and outgoings, and this is the only deduction available under property tax (aside from rates paid by the owner). Property owners cannot claim actual expenses, even if those expenses exceed 20% of rental income.

Non-deductible items include:

• Mortgage interest payments
• Building management fees
• Insurance premiums
• Decoration and renovation costs
• Rent collection fees
• Government rent
• Advertising costs for finding tenants
• Legal fees related to tenancy agreements

The Inland Revenue Department will not ask for evidence of actual expenses incurred, and additional claims for these items should not be made on property tax returns. The 20% allowance is applied automatically regardless of actual spending.

Important Exception: Personal Assessment Election

There is one important exception to this rule. Property owners who elect for Personal Assessment can claim deductions for mortgage interest incurred on the acquisition of the property. Personal assessment is a form of tax relief where income chargeable to salaries tax, profits tax, and property tax is aggregated and taxed together, allowing for additional deductions and allowances.

Under personal assessment:

• Interest payable on money borrowed to acquire a property used for letting is deductible
• The deduction cannot exceed the net assessable value of each individual property let
• Interest relating to periods when the property is not let (vacant or owner-occupied) is not deductible
• Personal allowances can also be claimed, potentially reducing overall tax liability

However, personal assessment is not always advantageous. Under personal assessment, tax is calculated at progressive rates (up to 17%) on aggregated income. Since the standard property tax rate is 15%, taxpayers with substantial income from other sources may pay more tax under personal assessment. Each property owner should calculate both scenarios to determine the most beneficial option.

Misconception #3: Owner-Occupied Properties Are Subject to Property Tax

The Rental Income Principle

Property tax in Hong Kong is levied exclusively on rental income. If you own a property in Hong Kong and live in it yourself, you are not receiving rental income, and therefore no property tax is payable. This is a fundamental principle that many property owners misunderstand.

Key points about owner-occupied properties:

• No property tax is payable on properties occupied by the owner for self-use
• If a property is partially let and partially owner-occupied, only the rental income from the let portion is subject to property tax
• Properties used by the owner for business purposes are not subject to property tax (though business profits are subject to profits tax)
• Charitable bodies approved under section 88 of the Inland Revenue Ordinance can be exempted from property tax

Don’t Confuse Property Tax with Rates

An important distinction must be made between property tax and rates. Rates are an indirect tax levied on all properties in Hong Kong, regardless of whether they are owner-occupied or rented out. Currently, government rent is calculated at 3% of the rateable value of the property. For 2025, rates for domestic properties are charged on a progressive scale:

• 5% for the first HKD 550,000 of rateable value
• 8% for the next HKD 250,000
• 12% for the remainder

Unlike property tax, which only applies to rental income, rates are payable by all property owners in Hong Kong regardless of occupancy status.

Misconception #4: Only the Portion of Rental Income I Keep Is Taxable

What Constitutes Rental Income

Rental income for property tax purposes is comprehensive and includes:

• Base monthly or annual rent
• Property premiums or lump sum payments
• Service charges paid by tenants
• Management fees paid by tenants
• Rates paid by the tenant on behalf of the owner
• Repairs and outgoings paid by the tenant either to the owner or on behalf of the owner under the terms of the lease
• Any other consideration for the right to use the property

All of these amounts must be reported as gross rental income on property tax returns. The only deductions allowed are rates paid by the owner (not the tenant) and the 20% statutory allowance for repairs and outgoings.

Misconception #5: Joint Owners Can Choose Who Reports the Rental Income

Joint Ownership Responsibilities

Under the provisions of the Inland Revenue Ordinance, every joint owner or owner in common has full reporting and tax payment responsibilities. This means:

• Each co-owner must report the full rental income on their property tax return (not just their proportionate share)
• Each co-owner is responsible for paying the full amount of property tax
• The Inland Revenue Department can pursue any or all co-owners for the full tax amount
• Co-owners cannot agree among themselves to have only one person report and pay the tax

If you receive rental income from a property that is solely owned by you, you report it in your Tax Return – Individuals (BIR60). If the property is jointly owned or co-owned, a separate property tax return must be filed.

Misconception #6: Rental Income from Common Areas Is Not Taxable

Common Area Rental Income

Common areas of a building such as side shops, car parks, external walls, and rooftops are typically collectively owned by the individual owners of the building. When any part of the common areas is let out, the rental income derived is chargeable to property tax.

Each individual owner is responsible for:

• Reporting their proportionate share of rental income from common areas
• Paying property tax on that income
• Ensuring accurate reporting even if a property management company collects the rent

This often catches property owners by surprise, as they may not realize that income from telecommunications equipment on the rooftop, advertising on external walls, or leased parking spaces must be reported and taxed.

How to Calculate Your Property Tax Correctly

Understanding the correct calculation method will help you comply with tax obligations and avoid penalties. Here’s the step-by-step process:

Step 1: Determine Gross Rental Income

Add up all rental income received during the year of assessment (April 1 to March 31), including rent, premiums, service charges, and any other consideration paid by tenants.

Step 2: Deduct Rates Paid by Owner

Subtract the rates that you, as the owner, have paid during the year. Note that government rent is not deductible, only rates.

Step 3: Deduct Irrecoverable Rent (if applicable)

If you have rental income that has been proven irrecoverable, this can be deducted.

Step 4: Apply 20% Statutory Allowance

Multiply the result by 80% (or subtract 20%) to apply the statutory allowance for repairs and outgoings. This gives you the net assessable value.

Step 5: Calculate Property Tax

Multiply the net assessable value by 15% to determine your property tax liability.

When to Consider Personal Assessment

Personal assessment can reduce your overall tax liability in certain situations, particularly if you have mortgage interest payments or other allowable deductions. Consider personal assessment if:

• You have significant mortgage interest payments on the rental property
• Your only income is from property rental (you can claim personal allowances)
• You have losses from other sources that can offset rental income
• Your total income is relatively modest (to benefit from progressive rates starting at lower percentages)

Personal assessment must be elected in writing by completing Part 7 in the Tax Return – Individuals (BIR60) or by submitting form IR76C within the specified time limits. The election can be made for each year of assessment, so you can evaluate annually whether it provides a benefit.