Mr. A plans to sell a dwelling he bought for 1.2 billion won in 2016 soon. The current market price is 3.2 billion won, so the capital gain is estimated at about 2 billion won. After buying it, Mr. A rented it out for eight years and lived there himself for the past two years. Under tax law, the long-term holding special deduction rate Mr. A can receive is 48% (residence 8% and holding 40%).
However, under the 2026 tax reform plan the government is pursuing, Mr. A's long-term special deduction rate, with a short actual residence period, will remain the same at 48% through next year but will plunge to 32% the year after next and to 16% in 2029. As a result, the deduction amount will shrink to about one-third, increasing the tax from 236 million won to 405 million won by about 170 million won.
People like Mr. A, whose actual residence period is shorter than the period they held a single home, are expected to face higher capital gains taxes starting the year after next. That is because the government will phase out the capital gains "holding deduction" and abolish it in 2029. The "residence deduction" will remain, but a deduction cap will be newly set at 2 billion won the year after next and 1 billion won in 2029. The aim is to limit unlimited tax credits for owners of ultra-high-priced dwellings.
Currently, capital gains tax is determined by applying the long-term special deduction rate based on holding and residence periods to the capital gain, subtracting the basic deduction (2.5 million won), and multiplying by the capital gains tax rate of 6%–45% according to the tax base. The current long-term special deduction rates are the same for holding and residence at 4% per year each, up to 40% per person.
◇ From 2029, you must actually live there to get the long-term special deduction
According to the Ministry of Economy and Finance on the 3rd, the "residence deduction" applied when a single-home owner sells a home will be maintained at up to 4% per year through next year, raised to 6% the year after next, and to 8% in 2029. The maximum deduction rate per person will rise to 40% through next year, 60% the year after next, and 80% in 2029.
By contrast, the "holding deduction" will be phased out. Through next year, the 4% per year (up to 40%) deduction rate will be maintained, but it will be lowered to 2% per year (up to 20%) the year after next and fully abolished in 2029. For example, if a person who held a home for 15 years and lived there for five years sells it, the deduction rate applied the year after next would be 50% (holding 20% and residence 30%), and based on 2029 it would be 40% (residence only at 8% per year with no holding deduction).
For multiple-home owners, the holding deduction will also be converted to a residence deduction. Currently, only the holding deduction is 2% per year (up to 30%) and will be maintained through next year. The year after next, the higher of ▲ holding 1% per year, up to 15% ▲ residence 2% per year, up to 30% will apply, and in 2029 only the residence deduction will remain.
The government also included in the tax reform plan a measure to expand the basic capital gains deduction for people who have lived in a home for at least 10 years. For a single home with a transfer price of 3 billion won or less and residence of at least 10 years, the basic deduction will increase from 2.5 million won to 25 million won starting next year.
◇ Ultra-high-priced dwellings to face deduction caps, no unlimited long-term special deduction
A per-person cap on long-term special deductions will also be newly introduced at 2 billion won the year after next and 1 billion won in 2029. Currently, there is no cap. Because the long-term special deduction amount increases in proportion to the capital gain, the ability to receive such amounts is limited to ultra-high-priced dwellings located in places like Gangnam and Seocho.
According to the National Tax Service, as of 2024, the number of single homes that received the long-term special deduction was 24,816, with a total deduction amount of 5.03 trillion won. The average per home is about 200 million won. Among the top 100 households that received the largest long-term special deductions, 87 were in Gangnam District and Seocho District, with average deduction amounts of 4.1 billion won and 3.1 billion won, respectively.
The cap on long-term special deductions is apportioned by equity share when a dwelling is jointly owned by spouses or others.