South Korea Weighs Capital Gains Tax Break Shift to Favor Owner-Occupiers

The government has repeatedly signaled a tax overhaul that would shift the long-term holding special deduction on capital gains tax from rewarding simple ownership to prioritizing owner-occupancy. The move increasingly targets single-home owners who do not live in the property, aiming to curb speculative demand and encourage more homes to come onto the market. Critics, however, say it will be difficult to design rules precise enough to ensure the policy works as intended.

According to government officials on Wednesday, the government and the ruling party are reviewing options including scrapping the current deduction based on holding period (up to 40%) and recognizing only a deduction tied to the period of residence. The review reflects criticism that the benefit is concentrated among owners of high-priced homes.

Kim Yong-beom, policy chief at the presidential office, recently reiterated the need for changes, saying it is worth reconsidering whether applying the same 40% to both holding and residence fits a housing market centered on actual residents. Separately, Choi Hyuk-jin, an independent lawmaker, last month introduced an amendment to the Income Tax Act aimed at restructuring the deduction around owner-occupiers, accelerating efforts to legislate the change.

Under the current law, a one-household, one-home owner with a sale price exceeding 1.2 billion won can receive a 40% deduction for holding the home for at least 10 years and another 40% for living in it for at least 10 years, for a maximum 80% capital gains tax deduction. If the overhaul is implemented, the tax burden for single-home owners who do not live in the property is expected to rise sharply. In a simulation by Woo Byung-tak, a specialist adviser at Shinhan Bank’s Premier Pathfinder, a homeowner who held a home for 10 years and lived in it for two years would see capital gains tax on a 3 billion won profit rise about 70%, to 799.40 million won from 466.76 million won.

A key challenge is enforcement. The enforcement decree and rules for the Income Tax Act list “unavoidable reasons” such as job transfers and schooling for meeting capital gains tax exemption requirements for one-household, one-home sales. Practitioners say real-life living arrangements are far more complex, making it hard to set detailed standards that distinguish speculative buyers from a broad range of “separated households” who live apart for work or education reasons.

Limits on administrative capacity are also cited. While the National Tax Service uses indicators such as utility usage and credit card spending, critics say it cannot fully screen out evasive cases such as partial household occupancy or partial leasing. As rules become more complex, concerns are growing that administrative costs will rise while loopholes multiply.

In an analysis based on 2020 Population and Housing Census data, Lee Chang-moo, a professor at Hanyang University, found that in Seoul, 6.4% of all households fell into the category of separated households.

Experts also warn that overly strict rules could restrict housing moves by end-users and accelerate a shift in the rental market toward monthly rent. If exceptions are narrowly defined, nonresident single-home owners may move into their homes to qualify for the deduction, potentially pushing existing tenants into the monthly rental market.

Lee, a professor of urban engineering at Hanyang University, said it is difficult to draw a uniform line on residency and that long-term holding itself is not generally treated as speculative behavior in major countries such as Germany. He warned that tougher taxation on nonresident single-home owners could increase social costs and induce unnecessary moves, ultimately reducing the share of rental housing in city centers.