Tax chief says long-term deduction system favors priciest homes, rewards unearned gains

National Tax Service Commissioner Lim Gwang-hyeon has called for an overhaul of the long-term holding special deduction system ahead of the government's planned announcement on real estate tax reform.

Lim said Sunday on his SNS account that the current long-term holding special deduction is "excessively regressive" because it allows homeowners who have held and lived in a property for 10 years to deduct up to 80 percent of taxable capital gains with no ceiling. "The more expensive the home — and therefore the larger the gain — the bigger the deduction," he said.

The long-term holding special deduction was introduced to ease the capital gains tax burden on long-held real estate. It applies to single-household owners of homes with an actual transaction price exceeding 1.2 billion won ($817,000), offering a deduction rate of up to 40 percent each for the holding period and the residency period, for a combined maximum of 80 percent.

Lim released an analysis of capital gains tax filing data for homes sold in 2024 to illustrate what he described as a concentration problem in the current system.

According to the data, Seoul accounted for 4.5 trillion won — 90 percent — of the 5.03 trillion won in total long-term holding special deductions claimed by 24,816 single-household owners nationwide. Within Seoul, Gangnam's three districts and Yongsan-gu alone accounted for 3.5 trillion won, or 78.6 percent of the capital's total.

Regional disparities were stark. In Gangnam-gu, 2,873 cases received a combined 1.55 trillion won in deductions — an average of 540 million won per case — while in Dobong-gu, just two cases received a total of 20 million won, or 10 million won each.

Among the top 100 properties by deduction amount, 99 were in Seoul, and 87 of those were in Gangnam-gu (68) and Seocho-gu (19). The average deduction in Gangnam-gu was 4.1 billion won and in Seocho-gu 3.3 billion won. One property in Gangnam-gu alone received more than 20 billion won in deductions in a single transaction.

"The basic principle of taxation is progressivity — those with higher incomes pay more — but the long-term holding special deduction has produced a regressive outcome in which unearned gains are fully protected," Lim said. "The system is effectively telling people to put everything into one premium property."

He added that 17 years have passed since the maximum long-term holding special deduction rate for single-household owners was raised to 80 percent with no cap in 2009. "It is generally better for the tax system to remain consistent, but if unexpected side effects emerge, fine-tuning is an obligation the government must fulfill," he said. He closed by asking: "Even if we protect the long-term holding special deduction for middle-class homeowners, what do we make of offering unlimited deductions like this for ultra-high-priced properties?"