The heavier capital gains tax on owners of multiple dwellings took full effect on the 10th. In 12 designated adjustment areas in Seoul and Gyeonggi Province, the capital gains tax that owners of multiple dwellings must pay when selling dwellings is expected to increase by as much as hundreds of millions of won. As owners of multiple dwellings with a heavy tax burden have already disposed of some of their dwellings, the remaining owners of multiple dwellings are expected to begin a full-fledged holdout despite the tax burden. There are also concerns that a "lockup of listings" by owners of multiple dwellings will emerge and intensify instability in the housing market.
According to the Ministry of Land, Infrastructure and Transport and the real estate industry on the 10th, from this day, the heavier capital gains tax applies to owners of multiple dwellings in adjustment areas, including the 25 districts of Seoul and 12 areas in Gyeonggi Province.
Under the current system, the basic capital gains tax rate is 6%–45%. In adjustment areas, owners of two dwellings face an additional 20 percentage points, and those with three or more dwellings face an additional 30 percentage points. Including the 10% local income tax, the effective tax rate for those with three or more dwellings rises to as high as 82.5%.
With the surtax on capital gains, owners of multiple dwellings are expected to see a sharp increase in their tax burden when selling. When the heavier tax applies, the special long-term holding deduction is also unavailable, meaning they are likely to pay as much as hundreds of millions of won more in taxes.
According to a simulation of the heavier capital gains tax by Park Dam, a tax specialist at the Inheritance and Gift Center of the Living Trust Consulting Department at Hana Bank, assuming an owner of two dwellings bought Jamsil Ls in Songpa District, Seoul, for 1.7 billion won in Jul. 2022 and sold it for 3.1 billion won, the capital gains tax (excluding local income tax) increases from 525.13 million won to 842.43 million won. For an owner of three dwellings, the capital gains tax is 982.18 million won.
Assuming a purchase of Mok-dong New Town Complex 7 in Yangcheon District, Seoul, for 820 million won and a sale after holding it for 10 years, the capital gains tax before the surtax was 501.73 million won. Going forward, however, owners of two dwellings will have to pay 959.43 million won, and owners of three dwellings will have to pay 1.11718 billion won in capital gains tax.
With the tax burden rising sharply, forecasts say it will be difficult for owners of multiple dwellings to sell their dwellings. Nam Hyuk-woo of the Real Estate Research Institute at Woori Bank said, "It is clear that those who own several apartments will see their tax burden increase significantly, so among owners of multiple dwellings, those who expected the real estate market outlook to be unfavorable sold their dwellings and chose to become owners of one dwelling." Nam added, "Owners of multiple dwellings now have few options. Even if they want to sell, they cannot," and said, "For owners of three dwellings, the effective tax rate is 82.5%, so selling will be difficult."
Despite expectations of a heavier capital gains tax burden, owners of multiple dwellings who have not sold appear to have already prepared countermeasures against future increases in holding taxes through asset rebalancing. There are cases of raising monthly or jeonse rents for apartments or disposing of apartments to buy properties in redevelopment project areas. Some owners of multiple dwellings are also expected to continue considering gifts, household separation, or postponing household consolidation if holding tax burdens grow.
A real estate expert said, "In the case of owners of three dwellings, many sold one and chose the position of owning two dwellings. Instead, they switched one of the two dwellings from jeonse to monthly rent and adjusted it to receive the highest possible monthly rent to prepare for holding taxes." The expert added, "Some former owners of multiple dwellings bought occupancy rights while holding only one apartment," and said, "There are many cases of rebalancing real estate assets by purchasing villas in redevelopment project areas that are about to relocate residents or where the projects are fairly advanced. In such cases, the holding tax burden can be partially reduced."
If listings by owners of multiple dwellings are locked up in this way, instability in the housing market could intensify. While a lockup of listings could put the overheated real estate market into a breather, some point out that it could lead to price increases after a certain period. According to the Korea Research Institute for Human Settlements (KRIHS) study "Analysis of policy response behavior of market participants to real estate market policies and evaluation measures," when the capital gains tax rate for owners of multiple dwellings rises by 1%, the change rate of apartment sales transaction volume falls by 6.879%, while the change rate of sales prices increases by 0.206%. In short, transactions decreased, but prices rose.
Seo Jin-hyeong, a professor in the Department of Real Estate Law and Administration at Kwangwoon University, said, "As the heavier capital gains tax on owners of multiple dwellings takes full effect, listings will plummet and transactions will also likely decline," and said, "Even if some listings appear, they will likely emerge in non-core areas rather than core areas, potentially deepening polarization between regions again."
However, given the possibility of tax reform and additional loan regulations, some owners of multiple dwellings may be unable to hold out later.
Kim Hyo-seon, chief real estate specialist at KB Kookmin Bank, said, "After the end of the grace period for the heavier capital gains tax on owners of multiple dwellings, the trend of decreasing listings in the Seoul apartment market is highly likely to take hold," but also noted, "The market's character could change in the second half. Stronger variables than the capital gains tax are holding taxes and financing costs." Kim added, "After the second half, the market could shift to a phase where the number of listings increases not because people want to sell, but because they find it hard to hold on."