The government is reviewing plans to reform the long-term capital gains tax exemption (LTGE) for real estate, focusing on actual residency, ahead of a national discussion on real estate policy scheduled for July 23. The proposed changes include reducing benefits for non-residential properties and differentiating exemption rates for high-value homes, raising concerns about how to adjust the tax burden for long-term homeowners and retirees.
◆ Maximum 40% for Ownership and Residency... Review of Non-Residential Exemptions
According to relevant authorities, the government has been conducting discussions on supply, finance, and tax policy since July 14, culminating in a presidential-led real estate forum on July 23. The discussions will synthesize feedback from these meetings and online consultations to shape future real estate policies and tax reforms.
While specific reform proposals have not yet been finalized, key issues under consideration include whether to reduce benefits for non-residential properties and whether to apply different exemption rates for high-value homes.
The LTGE allows individuals who have held real estate for an extended period to deduct a portion of their capital gains when selling their homes, thereby alleviating the tax burden that can arise from sudden taxation on accumulated gains.
The current system already considers both the holding period and residency for homeowners. For properties sold for more than 1.2 billion won, homeowners can receive a maximum deduction of 40% based on a holding period of 10 years or more and an additional 40% based on residency of 10 years or more. In contrast, general real estate outside the one-home rule only qualifies for a maximum 30% deduction after being held for 15 years.
The core of the proposed reform is not to introduce new residency requirements but to reduce the weight of deductions based solely on ownership while enhancing benefits based on actual residency. Currently, homeowners who do not reside in their properties can still receive deductions for long-term ownership. Discussions among government officials and stakeholders suggest lowering the ownership deduction limit while expanding residency deductions or reducing the maximum deduction rate for high-value homes.
Proponents of the reform argue that providing tax benefits solely for long-held non-residential properties contradicts the principle of taxing based on actual demand. They emphasize that as property values and capital gains increase, the corresponding deduction amounts also rise, questioning the appropriateness of applying the same maximum deduction rate of 80% to high-value homes.
◆ Tax Burden on Retirees and Concerns Over Market Lock-Up... Transitional Measures Are Key
Addressing potential side effects of the reform is also a challenge. Applying stricter criteria uniformly to long-term homeowners who have relied on the existing system could undermine tax predictability. Homeowners unable to reside in their properties due to work or family issues, as well as retirees looking to fund their retirement through home sales, may face unexpectedly high tax burdens.
According to the National Data Agency, as of 2024, the national housing supply rate stands at 102.7%, with the number of homes exceeding the number of households. However, the homeownership rate remains at 57.7%, indicating a disconnect between actual residency and asset ownership. Additionally, the Ministry of Land, Infrastructure and Transport's 2024 housing survey reported a homeownership rate of 61.3%, suggesting that many homes are used for investment or rental purposes. This structure supports the argument for a residency-focused tax system.
Concerns have also been raised that reducing the LTGE could lead to a market lock-up. If the tax burden increases sharply, homeowners may delay selling their properties, resulting in fewer homes available on the market. There is a possibility of a temporary surge in listings before the implementation of the new system or a slowdown in transactions until the reform details are finalized.
Consequently, market attention is focused not only on the exemption rates but also on the criteria for application and the timing of implementation. Whether transitional measures will be established to apply previous regulations to existing homeowners or if the new criteria will apply only to homes acquired after the reform will significantly affect perceived tax burdens. Gradual adjustments to exemption rates or a temporary grace period are also being discussed as alternatives to mitigate market shocks.
Lee Eun-hyung, a researcher at the Korea Construction Policy Institute, stated, "For an increase in housing supply to lead to market stability, a balance between supply and demand is necessary. Suppressing demand while increasing supply may lead to conflicting directions, so the impact of demand suppression and strengthening residency for one-home ownership should also be discussed."
* This article has been translated by AI.
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