A person surnamed Kim, who had owned multiple dwellings, sold all the apartments previously rented out ahead of the end of the temporary suspension of the capital gains tax surcharge on May 9. Weighing where to invest the money, Kim decided to buy a retail unit or a small building, which face fewer restrictions. But after hearing talk that there are now even calls to abolish the long-term holding special deduction (Jangteuk gongje) for capital gains tax not only on non-residential dwellings but also on commercial real estate, Kim grew unsettled. The maximum deduction rate is already low at 30%, and if even that is abolished, it may be hard to expect capital gains upon sale. With high vacancy rates, investing in a building solely for rental revenue does not seem to offer much practical benefit.
As the government signaled the end of the temporary suspension of the capital gains tax surcharge on owners of multiple dwellings, more rental business operators like Kim are looking to commercial real estate instead of residential. However, after a recently introduced Income Tax Act amendment included a proposal to abolish the long-term holding special deduction for commercial real estate as well, rental business operators are expressing discomfort. Experts note that rising rents due to the shifting of taxes could in turn hurt self-employed people, and that major commercial districts could be hit, accelerating an economic downturn.
According to the National Assembly and others on the 28th, Rep. Choi Hyeok-jin (independent), a member of The National Assembly's Legislation and Judiciary Committee, the previous day introduced an amendment to the Income Tax Act that would abolish the capital gains tax long-term holding special deduction applied based on the period of holding dwellings. Currently, single-household single-dwelling owners can receive up to 80% in capital gains tax reductions, with up to 40% each for holding and for residence, applied separately.
The amendment also includes a plan to abolish the long-term holding special deduction for "non-dwelling assets." The bill states, "Delete the deduction rates by holding period under the current long-term holding special deduction that apply to non-dwelling assets (land, buildings, etc.) and the deduction for member occupancy rights, in order to block tax cut benefits arising from speculative holdings of non-dwelling assets."
It would abolish the long-term holding special deduction not only for dwellings but also for commercial real estate, prompting concern in the market. Unlike dwellings, which receive a maximum 80% long-term holding special deduction when lived in for at least two years and held for at least 10 years, non-dwellings must be held for at least three years, and even if held for 15 years or more, the maximum capital gains tax reduction cap is only 30%. If this is abolished, rental business operators may find it hard to gain practical benefit, which could restrict new supply of commercial real estate and drive up rents, observers say.
Song Seung-hyun, head of Urban and Economy, said, "The maximum 30% capital gains tax long-term holding special deduction applied to non-dwellings reflects at minimum the inflation rate," adding, "If this is abolished, rental business operators will have almost no practical benefit from an operational standpoint, and in the end they may raise rents to make up revenue, making it harder for self-employed people."
Some also say the economic downturn could accelerate. A real estate expert who requested anonymity said, "Without tax-saving incentives, it is difficult for the depressed commercial real estate market to revive," and added, "If regulations are tightened just as asset owners are beginning to turn their attention, investment will be blocked and it will be hard for commercial districts to recover, which could soon lead to an economic downturn."