As the government moves to pressure multiple-home owners by imposing heavier capital gains taxes, concerns are growing in the market about side effects. The Moon Jae-in administration also pursued a policy of heavier capital gains taxes on multiple-home owners in the past, but housing prices rose instead as listings by multiple-home owners dried up. To reduce their tax burden at the time, multiple-home owners responded by separating children's households early or making gifts to children or between spouses, and withheld listings, blunting the policy's effectiveness. With that lesson in mind, voices are warning again of rising home prices and instability in the lease market after May 9, when the grace period for the heavier capital gains tax on multiple-home owners ends.
According to the government and the real estate industry on the 5th, the government is proceeding to end the grace period for the heavier capital gains tax on May 9. To reduce market confusion, it is pushing a plan to exempt the heavier capital gains tax if a contract is signed by the end of the grace period and the balance is paid within up to six months.
President Lee Jae-myung recently said, "People suffering from a surge in housing prices deserve more consideration than multiple-home owners who speculate in real estate investment and have the improper expectation that '(the grace period for heavier capital gains taxes) will be extended again,'" continuing to target multiple-home owners with daily remarks.
The heavier capital gains tax on multiple-home owners adds tax on top of the basic capital gains tax rate of 6–45% depending on the tax base, based on the number of dwellings owned. In designated adjustment areas, 20 percentage points are added to the basic rate for owners of two dwellings and 30 percentage points for owners of three or more. When the 10% local income tax is also applied, the maximum effective tax rate for owners of three dwellings rises to 82.5%. Simply put, if a home's price rises by 1 billion won, 800 million won must be paid in taxes. This system was introduced under the Moon administration, but was deferred each year by revisions to enforcement decrees under the Yoon Suk-yeol administration.
◇ Under the Moon administration, heavier capital gains taxes on multiple-home owners led to a freeze in listings
The market is concerned that the revival of the heavier capital gains tax for multiple-home owners will cause listings to seize up and drive housing prices higher. When the heavier tax was temporarily exempted in 2018, listings by multiple-home owners poured out; however, once the heavier tax took effect, listings dried up and prices of dwellings rose.
According to the Korea Research Institute for Human Settlements (KRIHS) 2024 study, "Analysis of market participants' behavioral responses to real estate market policy and evaluation measures," a 1 percentage point increase in the capital gains tax rate for multiple-home owners raised apartment sale prices by 0.206%. The finding is based on an analysis of apartment sale prices in 71 cities, counties and districts in the greater Seoul area from Jan. 2018 to Dec. 2022.
A similar analysis appeared in the Sept. 2021 construction trends briefing by the Construction Economy Research Institute of Korea. According to the institute, when the government signaled an exemption from the heavier capital gains tax through Mar. 31, 2018, registrations of ownership transfer for collective buildings in Seoul, then a designated adjustment area, increased 20% from previous years. However, five months after the heavier capital gains tax took effect, prices of multifamily dwellings in Seoul rose instead. The government then implemented a second temporary reduction in capital gains taxes from Dec. 2019 to Jun. 2020, but the increase in ownership transfer registrations was only 7%, and dwelling prices surged.
The institute noted, "As dwelling prices surged in August and September 2018, dissatisfaction grew among multiple-home owners who trusted the government's pledge to stabilize dwelling prices and sold during the first reduction period," adding, "The government sought price stability by temporarily reducing taxes before strengthening capital gains taxes to spur sales by multiple-home owners, but with a lag it manifested as dwelling price increases, indicating the heavier capital gains tax policy failed."
◇ "If holding taxes rise, the burden will be passed on to tenants"
In the market, the prevailing view is that once the heavier capital gains tax on multiple-home owners is reinstated, a renewed freeze in listings will push housing prices up. In response to projections that multiple-home owners will hold on while paying holding taxes, the president hinted at raising holding taxes, saying, "Even if the tax for holding on is higher than the tax paid when selling, would they really do that?" But there are also expectations in the market that the burden from higher holding taxes could be passed on to tenants.
Kim In-man, head of the Kim In-man Real Estate Economy Research Institute, said, "Just like under the Moon administration, there could be a rush of quick-sale listings before May 9, and then, with no alternatives, listings could lock up afterward," adding, "For multiple-home owners, considering the loan interest and holding taxes paid so far, they would have to sell at an actual loss, so who would sell?"
On raising holding taxes, Kim said, "If holding taxes are raised, at first owners will cover them with proceeds from deposits or stock sales, but then they will raise monthly or jeonse rents for tenants," adding, "However, if holding taxes get too high, even demand for dwellings will fall, and later owners might want to sell but be unable to." He said, "If that happens, dwellings could go to public auction and the crisis could spill over to banks, becoming a social problem."
Yu Seon-jong, a professor in the Department of Real Estate at Konkuk University, said, "When capital gains taxes go up, owners will hold rather than sell," adding, "To respond, the government seems likely to strengthen holding taxes, and in the case of multiple-home owners, they will bear the holding tax on the home they live in, but pass on the tax for rented homes to tenants."
Still, some say the market's response will vary depending on the degree of additional regulations such as holding taxes. Ham Young-jin, head of the real estate research lab at Woori Bank, added, "Once local elections end, the burden of managing policy will ease, making it hard to predict how strict loan and tax policies will be," and "If strong measures come out, the market could take a breather."