As the government tightens the burden of capital gains tax and holding taxes, high-value dwellings owners are moving quickly to find ways to cut taxes. Because capital gains tax will rise sharply starting in 2029, inquiries are increasing about so-called "same-place switching" and "exchange transactions," based on the judgment that it is better to settle capital gains once and move on.
Same-place switching means selling the home you live in and buying an apartment with similar conditions in a nearby area. An exchange transaction refers to an unusual transaction method of swapping owned dwellings with each other. Among some multiple-home owners, tax-avoidance tactics are also spreading, such as changing the use of multi-household and multi-family dwelling buildings to neighborhood living facilities to reduce the burden of holding taxes.
According to the real estate industry on the 6th, in Seoul's Gangnam area, inquiries about switching are coming one after another from long-term single-home owners. An official at a licensed real estate agency in Apgujeong-dong, Gangnam-gu, Seoul, said, "A customer in their 70s contacted us saying they wanted to sell this year and settle their capital gains once," and noted, "The capital gains were roughly more than 5 billion won, and they asked us to find a way to sell when deductions can be maximized and then buy a smaller home nearby."
Under the tax reform plan the government released on the 3rd, the current special long-term holding deduction will be changed to a long-term residence income deduction, and the capital gains deduction limit for one household with one home will be reduced to 2 billion won in 2028 and 1 billion won in 2029. There is currently no deduction limit, but a cap on the deduction amount has been set. When the deduction cap is reduced, the capital gains tax payable increases even if home prices are the same.
For example, if A, a single-home owner who purchased an 84㎡ exclusive area unit at "Raemian Prestige" in Banpo-dong, Gangnam-gu, Seoul, for 1.6 billion won and actually lived there for 10 years, sells the dwelling for 5.6 billion won early next year, the capital gains tax due would be 241.85 million won. Of the 4 billion won in capital gains, 2.68 billion won is deducted through the special long-term holding deduction (an 80% deduction rate applies for holding and residing more than 10 years), lowering the tax base to the 600 million won range, and the tax reflects this. However, starting in 2028, when the deduction cap applies, the capital gains tax imposed on A rises sharply. In 2028 it would be 449.85 million won, and in 2029 it would be 945 million won.
Because of this, long-term owners with capital gains in the several billions of won are actively considering the so-called same-place switching of first selling their existing dwellings and then buying a new home in a nearby area. Although they must pay acquisition tax on the newly acquired dwellings, the capital gains tax-saving effect is greater. If A sells the home and then buys another apartment in a nearby complex priced at 5.6 billion won, the acquisition tax due would be 184.8 million won. The total taxes required from disposal to new home acquisition (capital gains tax + acquisition tax) come to 426.65 million won, which is about 500 million won lower than the capital gains tax due if selling after 2029.
Woo Byung-tak, a senior advisor at Shinhan Premier Pathfinder, explained, "With the tax reform, you can avoid having to pay more capital gains tax three years from now, and if you sell now and buy again, your acquisition cost goes up, which reduces the capital gains tax burden when you sell again later, so this kind of transaction is being considered."
Inquiries are also increasing about "exchange sales," where people swap the homes they live in. This is a transaction to exchange dwellings within an apartment complex with similar publicly assessed prices, and its purpose is likewise to reduce capital gains tax. Lee Jang-won, a representative tax accountant at Rich Tax Corporation, said, "Since late last year, when the political sphere began discussing a cap on capital gains deductions, inquiries about exchange sales have continued, mainly from clients who own ultra-high-priced dwellings that are rarely on the market."
An official at a licensed real estate agency in Yongsan-gu said, "During the Moon Jae-in administration, when tax and loan regulations were tightened and housing transactions plummeted, there was a time when exchange sales for tax savings increased," and added, "With concerns about listings drying up and transactions shrinking due to stronger holding and capital gains taxes, we believe a similar situation could repeat."
There are also cases where multiple-home owners, facing a heavier holding tax burden, change the use of buildings previously used as dwellings to neighborhood living facilities. If changed to neighborhood living facilities, they are excluded from the dwelling count and are not subject to the multiple-home owner surtax, allowing both capital gains tax and acquisition tax to be reduced when selling. Tax accountant Lee Jang-won said, "There are also inquiries aimed at changing the use to neighborhood living facilities and then remodeling the interior back into dwellings to bring in tenants, but this falls under expedient, illegal rental cases."