Owning three mid-priced homes may cost more in tax than one luxury unit — and the government wants to fix that

As the government prepares to unveil a tax reform package later this month, it is wrestling with how to overhaul property holding taxes. A leading proposal would shift the basis of taxation from the number of homes owned to their market value — a change that has pushed two key issues to the fore: the threshold for classifying a home as "ultra-high-end" and the adjustment of the fair market value ratio used to calculate tax bills.

Property tax reform is set to be a central topic at a major real estate forum that President Lee Jae-myung will chair on July 23. Lee has said the forum will take up questions including how to differentiate tax burdens between owner-occupied single homes and non-resident or multi-home owners, whether to tighten property taxes overall, and where to draw the line on ultra-high-end housing. The core questions for this round of reform are expected to be whether to tax by number of homes or by value, and how far to adjust the overall tax burden.

Under the current system, the comprehensive real estate tax is calculated by subtracting a basic deduction — 1.2 billion won ($798,000) for single-home owners and 900 million won for multi-home owners — from the sum of publicly assessed values for all properties held by an individual, then applying a fair market value ratio of 60 percent to arrive at the taxable base. Tax rates and various credits are then applied to determine the final bill.

The problem with the current system is that owning several moderately priced homes can result in a heavier tax burden than owning a single high-priced one. A person holding three homes worth 1 billion won each, for example, can end up paying more in comprehensive real estate tax than someone who owns a single home worth 3 billion won. That anomaly has fueled a consistent call from the market to base tax liability on asset value rather than the number of properties owned.

Expert opinion is divided. Jung Se-eun, an economics professor at Chungnam National University, said that without stronger taxation on expensive single homes, demand could concentrate in the ultra-high-end segment. Kim Woo-chul, a taxation professor at the University of Seoul, countered that because owners of ultra-high-end homes represent only a small fraction of the population, the policy impact of tightening taxes on them may be limited.

The tax credit system for households that own a single home is also under review. Under current rules, homeowners who meet age or long-term ownership requirements can receive a tax credit of up to 80 percent, with no separate cap on the total credit amount. Critics say the benefit grows with the value of the home, giving disproportionately large breaks to owners of ultra-high-end properties.

However, adding actual residency as a condition for the credit would pose practical difficulties. Uniformly classifying as non-residents those who cannot live in their home due to work or education obligations would be hard to justify.

Another variable is where to set the threshold for "ultra-high-end" housing. Figures such as a publicly assessed value of 3 billion to 4 billion won have been floated as possible benchmarks, but there are concerns about a so-called cliff effect — a sharp jump in tax liability for homes just above the cutoff. One approach under consideration would tie the threshold to inflation or home-price growth to avoid that problem.

Whether to adjust the fair market value ratio is also drawing attention. The ratio rose from 80 percent in 2018 to 95 percent in 2021, then fell to 60 percent in 2022, where it has remained. Any change to the ratio would directly affect comprehensive real estate tax bills.

The tax reform package the government plans to release later this month is expected to cover not only property holding taxes but also capital gains taxes and the broader real estate tax system. To minimize market disruption, however, there is growing support for phasing in changes gradually rather than implementing them all at once. The July 23 real estate forum is expected to produce wide-ranging discussion covering not only tax bases and rates but also the timing and sequencing of any policy rollout.