[Weekly Review] Criticism of 종부세 Rounding Off Abandoned for 'Top 2% Threshold', Official Price Set at 1.1 Billion Won

Brokerage Fee Reduction... Financial Authorities Indicate Strengthened Household Debt Management

[Sejong=Asia Economy Reporter Moon Chaeseok] The Democratic Party of Korea decided to abandon its plan to set the comprehensive real estate tax (CRET) imposition target for single-homeowners at the top 2% based on official property prices after facing criticism over rounding errors. Instead, they agreed to raise the deduction threshold from the existing 900 million KRW to 1.1 billion KRW to reduce the number of taxpayers subject to the CRET. For the first time in seven years, brokerage fees were also lowered. Financial authorities announced plans to significantly strengthen household debt management, including advancing the implementation of the individual Debt Service Ratio (DSR) system by one year to start next year.

Unprecedented 'Rounding Error' Controversy: Top 2% CRET Cutoff Plan Scrapped

[Image source=Yonhap News]

On the 19th, the National Assembly's Planning and Finance Committee held a plenary session and passed an amendment to the CRET Act raising the deduction threshold for single-homeowners from 900 million KRW to 1.1 billion KRW. From this year, single-homeowners with properties valued at 1.1 billion KRW or less (market price approximately 1.6 billion KRW) will be exempt from paying the comprehensive real estate tax. If the amendment passes the plenary session on the 25th, it will apply to this year's tax.

The highly anticipated 'top 2% plan' was discarded. This was the Democratic Party's idea to set the CRET imposition target as homeowners in the top 2% by official property price. Initially, the Democratic Party proposed changing the tax base to the top 2% by official price (about 1.068 billion KRW this year), while the People Power Party suggested raising the threshold to 1.2 billion KRW. If rounded according to the ruling party's plan, the tax base would be 1.1 billion KRW.

The unprecedented top 2% plan was abandoned due to violations of the principle of taxation by law and controversy over rounding errors. After the policy news broke, the market experienced significant confusion for two months. According to the Democratic Party's plan, the cutoff for the top 2% this year was 1.068 billion KRW, which would be rounded up to 1.1 billion KRW as the tax base. This unprecedented standard was intended to adjust housing prices.

Additionally, the ruling party and government have reversed several major policies multiple times, including scrapping the two-year residency requirement for reconstruction apartment association members and reconsidering the reduction of tax benefits for rental business operators. The Democratic Party recently withdrew its plan to abolish the housing rental business system and decided not to apply the reduction of the long-term holding special deduction for capital gains tax retroactively to existing homeowners.

The real estate brokerage fee system, which sparked public outrage, has been improved. Starting this October, the maximum brokerage fee for selling a 1 billion KRW apartment will be lowered from 9 million KRW to 5 million KRW. For rental contracts with a deposit of 600 million KRW, the maximum fee will drop from 4.8 million KRW to 2.4 million KRW. On the 20th, the Ministry of Land, Infrastructure and Transport finalized and announced the 'Real Estate Brokerage Fee and Service Improvement Plan' reflecting these changes.

Going forward, the commission rate for properties priced between 600 million KRW and 900 million KRW will be reduced from 0.5% to 0.4%, a 0.1 percentage point decrease. Currently, a flat 0.9% rate applies to properties over 900 million KRW, but in the future, a tiered system will be applied: 0.5% for 900 million to 1.2 billion KRW, 0.6% for 1.2 billion to 1.5 billion KRW, and 0.7% for over 1.5 billion KRW. The maximum brokerage fee for a 900 million KRW property transaction will decrease from 8.1 million KRW to 4.5 million KRW, a reduction of about 44.4%, and for a 1.2 billion KRW transaction, from 10.8 million KRW to 7.2 million KRW.

Indication of Strengthened Household Debt Management Including Early Implementation of Individual DSR

Nominee for Financial Services Commission Chairman Ko Seung-beom. / Photo by Moon Ho-nam munonam@

Financial authorities announced plans to strengthen loan regulations to stabilize household debt. As a result, it is expected to become more difficult to obtain loans from financial institutions.

Ko Seung-beom, nominee for Financial Services Commission chairman, stated that the individual Debt Service Ratio (DSR) system, which was scheduled to be implemented gradually starting last month, will be implemented earlier, and that plans are being considered to strengthen DSR regulations for the secondary financial sector, which currently has relatively looser rules compared to the primary financial sector.

According to the DSR regulation introduced in July, an individual's total annual principal and interest repayment amount for all loans should not exceed 40% of their annual income. Currently, the primary financial sector applies a 40% DSR limit, while the secondary financial sector applies 60%, leading to a tendency for loans to concentrate in the secondary sector. It is understood that authorities have instructed to consider applying a uniform 40% DSR limit across both sectors.

Plans are in place to strengthen regulations by advancing the implementation of the DSR regulation, originally scheduled for 2023, to next year. Nominee Ko said, "It is necessary to carefully review whether the schedule for expanding the DSR regulation by July 2023 is appropriate and whether the relatively loose DSR regulation in the secondary financial sector could cause a balloon effect, and to prepare supplementary measures if necessary."

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