As President Lee Jae-myung called the capital gains tax relief for registered rental business operators a special favor, the likelihood of the benefit being phased out has grown. The legal community, however, says it is not a matter that can be resolved simply by revising an enforcement decree (presidential decree) to remove the benefit, and that it must be examined for any unconstitutional elements. The issue is tied to a classic topic in constitutional law, which also appeared on the bar exam (the former judicial exam): how far retroactive legislation affecting individuals may be allowed, because that question relates to abolishing the rental business operators' capital gains tax relief. Some say a ruling by the Constitutional Court is needed.
◇ President Lee targets those with "automatic cancellation"… "permanent special favor"
The capital gains tax relief that the president referred to on social media X (formerly Twitter) as a "permanent special favor" is set out in Article 97-3 of the Act on Restriction on Special Cases Concerning Taxation (special cases of capital gains tax on long-term general private rental dwellings, etc.) and Article 167-3 of the Income Tax Act (scope of dwellings subject to heavy capital gains tax for one household with three or more dwellings), among others.
It is stipulated by law that a person who registered a dwelling as a long-term rental dwelling—limited to the national housing size or less and with a standard market price of 600 million won or less (300 million won or less outside the Seoul metropolitan area)—and continuously rented it out for at least the state-prescribed period while capping rent (including deposits) increases at 5% or less, and who registered as a dwelling rental business operator with the local government and tax office by Dec. 31, 2020, would receive capital gains tax relief when selling the home later.
In Aug. 2020, the government amended the Private Rental Housing Act to extend the minimum mandatory rental period from the previous eight years to 10 years. It also required that private rental dwellings registered on or after Aug. 3, 2020, be maintained for 10 years, and apartments registered before that date be maintained for eight years, after which the rental business registration would be automatically canceled.
After such automatic cancellation, up to 70% of the long-term holding special deduction is applied to capital gains when selling a dwelling that had been used as a rental dwelling, with no deadline by which it must be sold. By contrast, if a business operator whose mandatory rental period has passed more than half cancels the business registration voluntarily (voluntary cancellation) and seeks to receive capital gains tax relief, the dwelling must be sold within one year after cancellation. What the president called a permanent special favor applies to automatic cancellation.
If the enforcement decree is revised to reflect the president's concerns, the benefits of those who registered for rental in expectation of receiving tax relief would disappear. This is expected to be done by including in the supplementary provisions of the enforcement decree a retroactive clause applying to all those who could have received tax relief under past laws, together with the decree's revision.
◇ How far can retroactive legislation go?… also tied to constitutional law
That said, how far such retroactive legislation can be allowed has been the subject of long-standing debate. The Constitution provides, "No citizen shall be deprived of property rights by retroactive legislation, nor shall any citizen be restricted in the exercise of the franchise." (Article 13, Paragraph 2).
The retroactive legislation prohibited by the Constitution concerns cases where interests protected by law are infringed by retroactive legislation (adverse retroactive legislation). Adverse retroactive legislation is further divided into two types: true retroactivity and quasi-retroactivity. True retroactivity applies to facts and legal relationships already concluded in the past. If the matter concerns a situation that has already ended in the past, it is deemed true retroactive legislation. By contrast, if it concerns facts and legal relationships that began in the past but are ongoing, it is regarded as quasi-retroactive legislation. Using rental business operators as an example, if the mandatory rental period has ended, it is likely to be true retroactivity; if the mandatory rental period is ongoing, it is likely to be quasi-retroactivity.
When interests protected by law are infringed by retroactive legislation, the Constitution, in principle, prohibits true retroactive legislation and allows it only exceptionally. By contrast, quasi-retroactive legislation is, in principle, permitted and exceptionally prohibited. For both true and quasi-retroactivity, whether a case falls into the exception requires comparing the public interest necessity of the new legislation with the protection of reliance on the existing law, a question the Constitutional Court also finds difficult to decide quickly.
Attorney Jeong Hee-chan of Anguk Law Office said, "It is a very important theme in constitutional law and a topic that frequently appeared on the old judicial exam and appears regularly on the current bar exam," adding, "If there were uniform criteria, it wouldn't appear on exams and there wouldn't be a body of case law, but because it is so difficult to judge, there are diverse precedents and it has been asked often."
Kim Seok-hwan, a professor at the Kangwon National University Law School, said, "The abolition of capital gains tax relief for rental business operators appears likely to be quasi-retroactive legislation," adding, "The requirements for tax exemption for one household with one dwelling have also changed over time, such as the threshold for high-priced dwellings, but those were not deemed true retroactive legislation, and this time seems similar."
An industry official said, "Even if it is an enforcement decree, registrations were made in accordance with procedures set by a past administration, and we have supplied rental dwellings for years while observing the rent cap. If the promised benefit is abolished overnight, who will trust enforcement decrees set by the government going forward?" The person argued, "However small the group of rental business operators may be, this is violence through a statutory revision."
According to the Ministry of Land, Infrastructure and Transport, as of 2024, there are 107,732 apartments among purchased rental dwellings nationwide, of which 42,500 are in Seoul. The president expected that if capital gains tax benefits on apartments owned by these operators are reduced, they would be put up for sale and help stabilize home prices. Minister Kim Yun-duk also hinted at scaling back capital gains tax relief for rental business operators, saying, "If necessary, we must make a decision," while attending a meeting on the leading districts for Phase 1 new town redevelopment projects held at Goyang City Hall in Gyeonggi on the 11th.