Conflict over Capital Gains Tax with Moon Administration, Transition Team Cooperates with Seoul City to Ease Property Holding Tax

by Jo Kangwook

by Kim Minyoung

Published 12 Apr.2022 12:47(KST)

[Image source=Yonhap News]

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Highest Tax Rate on Residential Property Tax

Plan to Set Tax Base Public Price at 900 Million KRW

Dispute Over Capital Gains Tax Surcharge

Transaction Tax Relief Divides Old and New

[Asia Economy Reporters Kangwook Cho, Minyoung Kim] The Seoul Metropolitan Government will report a tax reform plan including measures to ease holding taxes to the Presidential Transition Committee within this month. Seoul City and the Transition Committee are joining forces by building a joint front to 'lower holding taxes.' Since easing holding taxes is a campaign pledge of President-elect Yoon Suk-yeol, there is a high possibility that the tax reform plan proposed by Seoul City will be reflected in actual policy in some form. On the other hand, regarding the 'capital gains tax relief' promoted by the Transition Committee, conflicts with the Moon Jae-in administration have arisen, making clashes between the new power seeking to enforce it and the previous government inevitable.

◆ Seoul City Aligns Support for Holding Tax Relief = According to Seoul City on the 12th, the city will report a tax reform plan to the Transition Committee within this month that includes raising the highest tax rate on residential property tax and increasing the tax base bracket public price standard to around 900 million KRW. As recently as February, Seoul City announced the launch of a tax reform advisory group and planned to complete the tax reform service and officially propose it to the Transition Committee in May. However, they decided to advance this schedule. A Seoul City official said, "We will report before the Transition Committee's tax-related task force (TF) is launched," adding, "However, the 'comprehensive real estate tax and property tax integration' plan will be classified as a long-term task and pursued accordingly."

A likely scenario Seoul City will propose is adjusting the residential property tax burden cap rate from the current 130% to around 110-115%, and raising the tax base bracket set between 60 million KRW and 300 million KRW public price to reduce tax burdens. Professor Shim Kyo-eon of Konkuk University's Department of Real Estate, who leads the Transition Committee's real estate TF, and Kim Seong-bo, Director of Housing Policy at Seoul City, along with Jeong Jong-dae, Director of the Housing Policy Support Center, who are affiliated with Seoul City, have been dispatched as expert and working members respectively, establishing a communication channel between Seoul City and the Transition Committee. The core topic of the real estate tax TF launching in May is also expected to be holding tax. The Transition Committee stated, "The president-elect's consistent position is to reform the tax system according to tax principles rather than for real estate market management purposes, and holding taxes will be adjusted in terms of imposition level and fluctuation range considering taxpayers' ability to pay."

However, since this plan also requires amending laws, persuading the Democratic Party or the current government remains an issue. Yet, considering that Seoul City has the largest number of households paying holding taxes and the upcoming local elections, the Democratic Party faces political burdens if it refuses.

◆ Conflict Erupts Between Old and New Over Transaction Tax Relief = Another pillar of real estate taxation, the 'transaction tax' part, has already surfaced conflicts between the current government and the Transition Committee. A representative issue is whether to impose a capital gains tax surcharge on multi-homeowners. The Moon Jae-in administration officially rejected the Transition Committee's request on the 11th to exclude the capital gains tax surcharge on multi-homeowners for one year starting April. The Ministry of Economy and Finance rejected the Transition Committee's proposal on March 31 to reduce real estate tax burdens so that multi-homeowners could list properties before the comprehensive real estate tax assessment date on June 1, stating, "It could affect the stabilizing real estate market."

The conflict stems from fundamental differences in views on how this system will change the real estate market. The current government, which defines multi-homeowners as speculative forces, believes that punitive-level taxes will induce listings and stabilize housing prices. However, multi-homeowners burdened by high transaction taxes (capital gains tax) have chosen to 'hold or gift' properties. While housing price increases have stopped, the phenomenon of property withholding has become pronounced.

The Transition Committee views these side effects as 'anti-market' and believes transaction tax relief is necessary for market normalization. However, the Transition Committee also shortened the surcharge exemption period from two years to one year, reflecting concerns that deregulation could stimulate housing prices. The market expects that after the new government takes office, transaction tax relief will bring some multi-homeowners' properties to the market. However, amid the preference for a 'smart single home,' the listings are expected to be mainly non-Gangnam area and non-reconstruction properties. There are also voices that transaction tax relief alone has limitations in resolving the severe transaction freeze and normalizing the market. Kim Hyoseon, Senior Real Estate Advisor at NH Nonghyup Bank, said, "Measures such as easing loan regulations should accompany this to lead to a result where the market can properly absorb listings."