Real estate tax system, the possibility of reform centered on actual residence... Market change preview

As discussions about long-term holding special deductions for transfer income tax targeting single-housing owners spread rapidly ahead of the June local elections, the market is closely watching the possibility that the standards of the real estate tax system may shift from a “holding period” basis to whether the property is “actually being lived in.”

The long-term holding special deduction system was originally introduced as a mechanism to ease the tax burden on actual demanders. The system was announced in 1988 and took effect on January 1, 1989. It was designed to reduce the tax burden for single-housing owners who hold homes for longer periods by deducting part of their transfer gains when selling. The rationale for introducing it was that taxing long-term accumulated gains all at once could result in an excessively heavy tax burden, and it was necessary to reduce the so-called “housing source lock-in” phenomenon in which properties cannot be sold due to the heavy tax burden. Currently, when single-housing owners sell a home they have held for more than 3 years and lived in for more than 2 years, they may deduct 40% based on the holding period and 40% based on the residence period, for a total deduction of up to 80%.

The system was significantly expanded during the Lee Myung-bak administration in 2009 in response to the global financial crisis and the downturn in the real estate market. At that time, if a single-housing owner held a property for 10 years, they could receive a deduction of up to 80%. Since then, starting in 2020 under the Moon Jae-in administration, requirements for actual residence were strengthened, forming the current structure. On the surface, they are both single-housing owners, but the tax burden difference between actual residence and merely holding has already become substantial. For example, a home purchased for 700 million won 10 years ago and sold for 1.5 billion won after 10 years of actual residence would result in transfer tax of about 3.48 million won; but if it were only held for the same period without residence, only the standard deduction would apply, and the tax would increase to 31.33 million won. In a case of a high-priced home purchased for 2 billion won and sold for 4 billion won, the tax is 95.06 million won with actual residence, but as high as 480.63 million won without residence—an even larger gap.

Nevertheless, politicians and some civic groups believe that the current deduction system provides overly generous benefits to holders of high-priced homes. In particular, criticism has emerged that the tax system is encouraging the “carefully selected one” phenomenon seen in major areas along Seoul’s Gangnam District and key areas by the Han River—where assets are no longer spread across multiple homes, but instead concentrated in high-priced apartments in prime locations. President Yoon Jae-myung this year has also repeatedly raised the issue of tax benefits for non-residential single-housing owners on the X platform, and on April 18 explicitly stated that it violates fairness and common sense to sharply reduce transfer tax solely due to long-term holding, indicating a willingness to adjust the system. Recently, including 10 ruling-party lawmakers such as Yoon Jong-yu of the Progressive Party, have even submitted a bill to abolish the long-term holding special deduction for single-housing owners, with the discussion momentum spreading into the formal legislative stage.

However, the market and academia are more inclined to focus on the possibility of “restructuring centered on residence,” rather than abolishing it entirely. Because if the long-term holding benefits were completely removed, it could undermine the principle of protecting actual demanders, and instead stimulate short-term buying and selling or lead to a freeze in transactions. The government’s concept has not yet been made public, but based on discussions, it may increase the holding or transfer tax burden for non-residential single-housing owners, while setting non-residence cases temporarily as exceptions for unavoidable reasons such as schooling or work. Minister of Land, Infrastructure and Transport Kim Yun-deok also said in a radio interview on the 12th of last month that they will begin adjusting holding tax reforms, including ultra-high-priced and non-residential single-housing, and also improve the overall real estate tax system. After the Oct. 15 measures last year, the Ministry of Economy and Finance has been operating research projects covering the holding tax and transfer tax as a whole, along with cross-departmental working groups; some observers believe that specific proposals will be reflected at the earliest in the 2027 tax reform bill to be released in July this year.

The issue is the potential impact of the tax reform on the market. Some worry that even just pre-announcing stronger tax burdens could temporarily increase the supply of listings for sale before the reform. But after taxes are actually increased, demand from “upgrade-type” buyers may weaken, leading to fewer transactions and lower liquidity. This is especially likely for non-residential single-housing owners who earn a living by renting out their own homes, for people living in fully taxed rental housing outside, and for actual demanders who are gradually improving their living standards while bearing heavier burdens from transfer tax, acquisition tax, brokerage commissions, and moving costs. At the same time, there are also views that strengthening taxation on non-residential housing could reduce the supply of fully taxed rental units and push up monthly rents. This trend suggests that the real estate tax system is moving from being merely a tax issue to a stage that requires consideration in coordination with the transaction market, the rental market, and supply policies. How the market will respond in the future may depend on whether, alongside strengthening the tax system, the government can implement housing supply expansion policies in a precise and well-coordinated manner.