The Biggest Obstacle to Reconstruction 'Jaechohwan'... Legal Revision Essential to Lower Imposition Rate

[Image source=Yonhap News]

Excess Profit Over 30 Million KRW

Tax Imposed Up to 50%

Legal Amendment Requires Democratic Party Consent

[Asia Economy Reporter Kim Min-young] Among the regulations introduced under the current administration, the Rebuilding Excess Profit Recovery System (재초환) has been cited as the final obstacle to reconstruction projects. This regulation imposes a tax of up to 50% on excess reconstruction profits exceeding 30 million KRW per household. In high-priced housing complexes, the expected burden reaches several hundred million KRW, stalling project progress.

However, even efforts to reduce the core 'tax rate' of the 재초환 regulation face another hurdle as it requires a legal amendment. Since the consent of the Democratic Party is necessary, there are forecasts that easing the regulation to the level the market expects will be difficult.

President-elect Yoon Seok-yeol's pledge includes measures to ease the 재초환 burden, such as raising the tax base threshold, lowering the tax rate, expanding recognized cost items, and providing exemptions for long-term single-homeowners. Among these, the key points are raising the tax base threshold and lowering the tax rate.

The 재초환 was first legislated during the Roh Moo-hyun administration but was deferred until it was fully implemented in 2018 under the Moon Jae-in administration. The burden is imposed on the amount of housing price increase from the approval date of the association establishment promotion committee (start of taxation) to the completion approval date (end of taxation), excluding natural price increases and development costs.

According to Article 12 (Tax Rate) of the 재초환 law, the reconstruction burden is calculated by applying the tax rate to the amount of excess reconstruction profit calculated under Article 7 divided by the number of association members. If the average profit per member is 30 million KRW or less, they are exempt, but depending on the profit size, the burden can range from 10% to 50%.

According to the maintenance industry, since 2018, 63 complexes nationwide with approximately 33,800 households have been notified of the expected 재초환 burden. The higher the housing price, the larger the burden. The first complex in Gangnam to be taxed, Banpo Hyundai Apartment, is expected to have a final burden of about 340 million KRW per association unit. Due to the rapid rise in housing prices, this is about 200 million KRW higher than the 135.69 million KRW expected amount notified by Seocho District Office in 2018. This is because the 기준 for calculating excess reconstruction profit is the publicly announced price at the time the apartment is completed.

Since the enforcement decree does not delegate the tax rate, lowering the tax rate requires amending the 재초환 law. To amend the law, the consent of the majority party, the Democratic Party, is essential. This is why there are forecasts that easing the regulation to the level the market expects may be difficult.

Park Won-gap, Senior Real Estate Specialist at KB Kookmin Bank, said, "Association members expect to return to the level of late 2017 when there was no 재초환 burden. However, even if the Democratic Party partially agrees to the amendment, it is difficult to abolish the system, so the regulation may not be eased as much as the members expect."

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