"A Full Overhaul Could Trigger Tax Resistance" ... Likely to Lower Holding Deductions and Raise Occupancy Benefits [Controversy Over Long-Term Holding Special Deduction Reform]

A broad overhaul of real estate taxation is now under way, including major revisions to the long-term holding special deduction for Capital Gains Tax. Several amendment bills are currently being discussed in the National Assembly, and the existing deduction system for both occupancy and holding periods is expected to shift significantly toward an occupancy-based model. With President Lee Jae-myung having repeatedly criticized the unfairness of the real estate taxation system, including benefits tilted toward multiple-home owners, the scope of this tax reform is expected to be substantial. At the same time, some are warning about the market fallout, including a shortage of jeonse homes, rent increases being passed on to tenants, a freeze in listings from single-home owners, and fewer homebuying opportunities for people without homes.
According to the government and other sources on the 27th, the Ministry of Economy and Finance (MOEF) is expected to finalize its tax reform work, including the long-term holding special deduction, and release a comprehensive Tax Revision Bill in July. Related research commissioned last year on reforming real estate taxes such as the Holding Tax is also expected to be completed as early as next month.
The two sides are effectively carrying out joint research and reform work. Tax authorities are also moving quickly on revisions to real estate taxation.
An MOEF official said, "We are reviewing all real estate-related tax laws in a comprehensive manner," but added, "It has not yet been decided whether all amendments, including the long-term holding special deduction reform, will be included in the July Tax Revision Bill." Another official said, "The scale of reform will be different from the past," adding, "While the research project continues on its own track, tax authorities are closely examining the areas that need review in order to carry out the president's directive."
On the 24th, President Lee said, "If we want to protect the housing of single-home owners, it would be right to reduce deductions for non-occupancy holding periods and increase deductions for occupancy accordingly," pointing to the drawbacks of the Capital Gains Tax long-term holding special deduction, which he said encourages housing speculation.
Under the current system, the long-term holding special deduction allows up to 80% of Capital Gains Tax to be deducted, depending on holding and occupancy periods, when a property is held and occupied for more than 10 years. For a single-home household, the maximum deduction rate is 40% each for holding and occupancy. The point President Lee criticized in this dual structure is the deduction for simple holding alone.
Several partial revisions to the Income Tax Act have already been submitted to the National Assembly.
A proposed revision to the Income Tax Act, jointly introduced or separately submitted by lawmakers from the Democratic Party of Korea and the Progressive Party, would abolish the current maximum 40% holding-period deduction and instead apply a 16% deduction starting from an occupancy period of two years, expanding it to as much as 80% for long-term occupancy. Another bill proposes abolishing the long-term holding special deduction and converting it into a tax credit with a lifetime cap of 200 million won per person.
In the market, an "occupancy-based reform" that lowers the holding deduction rate while raising the occupancy deduction rate is being discussed as the most realistic scenario. That is because a full abolition of the long-term holding special deduction could sharply increase the tax burden on genuine one-home users.
For example, if the holding deduction is reduced to a maximum of 20% (2% per year) and the occupancy deduction is raised to a maximum of 60% (6% per year), a person who holds and occupies a home for 10 years would still be able to keep the current maximum deduction of 80%.
By contrast, a person who holds a home for 10 years without living in it would see the deduction rate cut from 40% to 20%. The idea is to protect single-home owners who have lived in their homes for a long time while reducing tax advantages for homes held for investment purposes or for long-term holding without actual occupancy. From the government's perspective, it can emphasize the policy goal of encouraging actual occupancy, and from the market's perspective, it is seen as a more realistic option because it would be less disruptive than a full abolition.
Kim Woo-cheol, a professor of tax studies at the University of Seoul, said, "The long-term holding special deduction should not be abolished; rather, it should be rationally adjusted so that it works properly." Kim Shin-eon, an adjunct professor at Dongguk University and a tax accountant, said, "If the existing framework that allows a maximum deduction rate of 80% is maintained, taxpayer backlash could be reduced."
Some have also raised a more fundamental reform proposal: abolishing the holding deduction rate itself and exempting single-home occupiers from Capital Gains Tax.
Song Young-kwan, a senior research fellow at the Korea Development Institute (KDI), said, "Instead of a complicated formula, it would also be possible to effectively exempt Capital Gains Tax for single-home occupiers," adding, "In that case, it may be reasonable to raise the tax rate starting with a second home, and tax a third home even more heavily."
skjung@fnnews.com Jung Sang-gyun, Kim Chan-mi, Choi Yong-jun