[Practical Finance] Real Estate Taxes Changed Again This Year...Careful Review Needed for Comprehensive Real Estate Tax and Capital Gains Tax

Understanding Real Estate Tax Changes in 2021

Maximum Comprehensive Property Tax Rate Raised to 6% for Multiple Homeowners
6% Flat Rate Applied to Corporations Owning 3 or More Homes
Joint Ownership of One Home Allows Selection of Comprehensive Property Tax Deduction
Capital Gains Tax Top Rate 45%... Changes in Exemption Conditions
Pre-sale Rights Included in Housing Count for Capital Gains Tax Imposition

[Asia Economy Reporter Moon Jiwon] As the government's real estate regulations pile up, related taxes are becoming increasingly complex. In particular, last year the government made significant policy changes by revising all taxes related to buying (acquisition tax), selling (capital gains tax), and holding (comprehensive real estate holding tax) houses to curb soaring housing prices. Not only multi-homeowners but also actual owners of single-family homes must carefully check the revised tax laws to prevent unnecessary tax expenses in the future. This article summarizes the real estate tax law changes that have been newly implemented or are scheduled to change this year.

Maximum 6% Comprehensive Real Estate Holding Tax Rate for Multi-Homeowners (January)

One of the most significantly changed taxes is the comprehensive real estate holding tax. For those owning two or fewer homes, the tax rate increased by 0.1 to 0.3 percentage points depending on the taxable base bracket, applying rates from 0.6% to 3.0%. For those owning three or more homes and two homes in regulated areas, the rate increased by 0.6 to 2.8 percentage points, raising the maximum rate to 6%. Especially for corporations, a flat rate of 3% applies for two or fewer homes, and 6% for three or more homes. This is intended to apply the highest tax rate, which applies to individuals, to corporations due to their significant involvement in housing speculation. However, public housing operators, public interest corporations, and construction rental housing operators are subject to the general progressive tax rates like individuals.

The tax burden cap is also adjusted. The tax burden cap for two-homeowners in regulated areas increases from the previous 200% to 300%, and the cap is completely removed for homes owned by corporations. Corporations also lose the basic deduction of 600 million KRW. Considering that this year the official property price realization rate is further increased and the fair market value application rate used to determine the taxable base has been raised from 90% to 95%, the comprehensive real estate holding tax burden for multi-homeowners is expected to rise significantly.

To Reduce Comprehensive Real Estate Holding Tax... Joint Ownership or Sole Ownership (January)

Couples owning a single home jointly can now choose the method of comprehensive real estate holding tax deduction. Previously, if a couple owned one home under sole ownership, they could receive a 900 million KRW deduction as a single household with one home, followed by elderly and long-term holding special deductions. However, if the home was jointly owned, each spouse could deduct 600 million KRW, totaling 1.2 billion KRW, but could not receive other deductions. Going forward, joint ownership of one home can also choose to receive the 900 million KRW deduction followed by elderly and long-term holding deductions, making joint ownership advantageous regarding comprehensive real estate holding tax.

Elderly Deduction Rate Raised to 80% (January)

The comprehensive real estate holding tax deduction limit for elderly or long-term holding single-home owners is also increased. The elderly deduction, applicable to those aged 60 and above, is raised by 10 percentage points per age bracket. The long-term holding deduction for those holding homes for more than five years remains at 20% to 50% depending on the holding period. The combined deduction limit of these two deductions increases from 70% to 80%. The longer elderly owners hold their homes, the more their comprehensive real estate holding tax burden is reduced.

Capital Gains Tax Top Rate Raised from 42% to 45% (January)

Last year, the basic capital gains tax rate ranged from 6% to 42%. However, starting this year, the top rate has increased to 45%. Previously, the highest rate of 42% applied to taxable bases exceeding 500 million KRW, but now a 42% rate applies to the 500 million to 1 billion KRW bracket, and a 45% rate applies to amounts exceeding 1 billion KRW.

How to Qualify for Capital Gains Tax Exemption on Single-Home Ownership? (January)

The conditions for capital gains tax exemption on single-home ownership have changed. Previously, multi-homeowners had to sell all homes except one and hold the final single home for at least two years after acquisition to qualify for the exemption. However, from this year, the two-year holding period starts from the date the person becomes a single-homeowner after selling all other homes. In other words, those who became single-homeowners this year from a multi-homeowner status must hold the last home for an additional two years to qualify for the exemption, while those who became single-homeowners last year qualify immediately.

(Photo by Yonhap News)

Pre-sale Rights Also Counted as Housing Units (January)

Pre-sale rights are rights to acquire a house. Therefore, pre-sale rights were not included in the number of houses when imposing capital gains tax. However, from this year, pre-sale rights acquired are included in the number of houses. Thus, owning one home and one pre-sale right may disqualify you from capital gains tax exemption, so caution is needed. However, if a single-home household acquires a pre-sale right more than one year after acquiring the existing home and sells the existing home within three years after acquiring the pre-sale right, it is considered a temporary single home and one pre-sale right, and the person is regarded as a single-homeowner for capital gains tax calculation. For reference, pre-sale rights acquired after August 12 last year are included in the number of houses when imposing acquisition tax.

Residence Requirement Added for Long-Term Holding Deduction (January)

Single-homeowners receive capital gains tax exemption benefits, but if the actual transaction price exceeds 900 million KRW, tax must be paid on the excess. Until last year, if the home was lived in for more than two years, a long-term holding deduction of up to 80% was applied at 8% per year for holding over ten years. However, from this year, residence is required in addition to holding. The previous 8% deduction rate per year is split into 4% for holding and 4% for residence. In other words, to receive the maximum 80% deduction, one must hold and reside in the home for over ten years.

Capital Gains Tax Bomb for Holding Less Than Two Years (June)

Until last year, selling a home held for less than one year incurred a 40% capital gains tax rate. However, from June, a flat rate of 70% applies to homes held less than one year, and 60% applies to homes held less than two years. Basic tax rates (6% to 45%) apply only to homes held for two years or more, depending on the taxable base bracket. Short-term holding is effectively considered speculation and is heavily taxed.

Capital Gains Tax Surcharge Rates Also Raised (June)

Multi-homeowners selling homes in regulated areas have their capital gains tax basic rates increased by surcharges: 10 percentage points for two-homeowners and 20 percentage points for those owning three or more homes. From June, these surcharges increase to 20 percentage points and 30 percentage points, respectively. Combining the highest basic rate (45%) with the highest surcharge (30 percentage points) can result in a maximum tax rate of 75%, so multi-homeowners should be cautious. Additionally, the capital gains tax rate on pre-sale rights currently applies a 50% rate regardless of holding period for those located in regulated areas, but from June next year, pre-sale rights sold will be taxed at 70% if held less than one year, and 60% otherwise, regardless of location.

This content was produced with the assistance of AI translation services.