The government's blade, drawn to block real estate speculation demand, is expected to point next at nonresident single-dwelling owners and high-priced dwelling holders after multi-dwelling owners. The government is set to revamp the long-term holding special deduction (LTSD) for capital gains tax around residency and has even signaled tighter lending rules. The aim is to draw out "tenanted listings" to prevent a sharp freeze in listings and a price surge after the end of the temporary suspension of heavier capital gains taxes on multi-dwelling owners, but the market reaction is that it will be hard to lead to a meaningful "increase in listings → fall in home prices." Some also argue that side effects such as a worsening jeonse and monthly rent crunch and a surge in rents could intensify.
The government is also reviewing a revamp of ownership taxes that would hit high-priced dwelling holders hard. Single-dwelling owners are included. The government's position is that regulation is needed because the "one smart unit" trend is spurring ladder moves and pushing up home prices, but backlash is expected to be significant.
◇ Tuning the LTSD's "40% for holding"
According to related ministries on the 11th, the government is reviewing plans to revamp the LTSD for capital gains tax. Under the current system, a single-dwelling owner holding a dwelling worth over 1.2 billion won can deduct 12%–40% of gains (for 10 years or more) based on the holding period and 8%–40% (for 10 years or more) based on the residency period.
A leading plan is to tune the deduction rate applied to the holding period. Deputy Minister Kim Yong-beom, head of the Presidential Policy Office, said at a press briefing on the 5th regarding the LTSD, "The reductions for residency and holding periods are both set at 40%, but we need to consider whether that aligns with reshaping the dwelling market around actual residency," signaling a residency-centered revamp. Earlier, President Lee Jae-myung said on the 24th of last month, "To properly protect the residence of single-dwelling owners, it is right to reduce the reduction for nonresidency holding periods and increase the reduction for residency holding periods by that much."
Currently, if a nonresident dwelling is held for 15 years or more and then sold, 30% of the gain is deducted. For example, if an apartment bought for 1 billion won 15 years ago is sold for 2.4 billion won, then now the taxable base (the basis on which tax is imposed) is 490 million won, calculated by subtracting the LTSD (210 million won) from the gain exceeding 1.2 billion won (1.4 billion won × 50% = 700 million won). The capital gains tax is then computed by multiplying by the tax rate (40%). However, assuming simply that the long-term holding deduction does not apply, the taxable base becomes 700 million won, the tax rate rises to 42%, and the tax burden increases.
The government has also warned that it will tighten regulations on existing loans taken out by nonresident single-dwelling owners. Deputy Minister Kim said, "It is only natural to block loans that are considered unrelated to end users going forward, and we are studying what to do about those already issued (loans)." The financial authorities are identifying the status of guaranteed jeonse loans taken by dwelling owners within regulated areas at banks and plan to prepare loan regulations based on this data and release them soon.
Experts see it as difficult for listings to increase significantly. Nam Hyuk-woo of Woori Bank's Real Estate Research Institute said, "In the short term, listings from single-dwelling owners short on funds may come to market, but in areas with strong residential conditions—such as locations close to jobs or good school districts—landlords are more likely to move in for actual residency, which could increase volatility in jeonse and monthly rents."
◇ Ownership tax revamp targeting the "one smart unit"
A strengthening of ownership taxes such as the comprehensive real estate tax and property tax is also anticipated. The industry sees a high possibility of raising the fair market value ratio. The fair market value ratio serves to lower the posted price, and raising this ratio increases ownership taxes on high-priced dwellings. Reducing the basic deduction for the comprehensive real estate tax (900 million won for multi-dwelling owners, 1.2 billion won for single-dwelling owners) and subdividing taxable base brackets are also being mentioned.
Strengthening ownership taxes is likely to deal a significant blow to high-priced dwelling holders. The concern is tax resistance. A real estate expert who requested anonymity said, "Capital gains tax is a tax you don't pay if you don't sell, and even if you do sell, there is an alternative—meeting the actual residency requirement to get a larger deduction," adding, "But ownership tax is an unavoidable tax you must pay simply for holding, so when the tax burden is increased, tax resistance is bound to be substantial. This will in turn be shifted to tenants, resulting in side effects such as rent increases."