Real estate tax overhaul enters revision mode as Assembly scrutiny looms

The government is weighing supplementary measures to its real estate tax reform package. While maintaining the core direction of raising the tax burden on single-home owners who do not live in their properties, officials are reviewing an expansion of exemptions for those unable to occupy their homes due to unavoidable circumstances, such as caring for grandchildren.

Adding to the uncertainty, Kim Min-seok was elected the new leader of the Democratic Party of Korea on Monday. Kim has been cautious about tightening taxes on non-resident single-home owners, and his election has fueled speculation that the National Assembly's review could result in a narrower tax increase than the government has proposed for the comprehensive real estate tax and capital gains tax.

According to the Ministry of Economy and Finance and other agencies, the government is reviewing possible revisions to its proposed amendments to the Comprehensive Real Estate Tax Act and the Income Tax Act based on public comments submitted during the legislative notice period, which runs through Thursday.

According to the Ministry of Government Legislation's public participation portal, 11,490 comments had been submitted on the proposed amendments from Aug. 4 through 9 a.m. Tuesday. The submissions centered on concerns about rising tax burdens, the scope of exemptions for non-resident single-home owners, and issues surrounding jointly held spousal property.

The government is prioritizing adjustments to non-residency exemption rules that can be made through enforcement decrees without requiring legislative amendments. The original proposal would allow non-residency periods of up to three years to count as residency periods for homeowners who relocated due to unavoidable circumstances — such as enrollment in school, a job change, illness or recuperation, overseas stays, or caring for elderly parents — provided certain conditions are met.

During the public comment period, however, a stream of submissions argued that the proposal failed to adequately account for a range of situations that force homeowners to live away from their properties, such as caring for grandchildren or supporting a child's education. In response, the government is considering adding some of the submitted cases to the list of exempted circumstances under the enforcement decree.

Officials are also examining calls to count relocation periods during remodeling as residency time. The government's proposal recognizes part of the construction period for redevelopment and reconstruction projects — where the owner has lived in the home for at least one year — as residency time, but excludes remodeling, prompting equity concerns. The government maintains that remodeling carries a different level of public burden than redevelopment or reconstruction, but is weighing the fact that remodeling also forces homeowners out involuntarily.

Deputy Prime Minister Koo Yun-cheol said on Aug. 7 that the government would gather additional public input during the enforcement decree revision process and review the matter as flexibly as possible. Core provisions requiring legislative changes — such as the comprehensive real estate tax rate and deduction structure — are nonetheless expected to be submitted to the National Assembly largely intact.

The government's proposal would raise the basic deduction for the comprehensive real estate tax for owner-occupiers of a single home from the current 1.2 billion won ($848,000) to 1.4 billion won, while applying a reduced deduction of 900 million won to non-resident single-home owners, widening the tax gap based on actual residency. The tax burden cap would also be raised from the current 150 percent to 200 percent to reflect the effect of the rate increase.

Capital gains tax benefits would similarly be differentiated by residency status. Under the current system, single-home owners can claim a long-term holding special deduction of up to 40 percent each for the holding period and residency period, for a combined maximum of 80 percent. The government's proposal would eliminate the holding-period deduction for non-resident single-home owners.

The government's residency-focused tax overhaul is expected to face considerable friction during National Assembly deliberations. With Kim now leading the Democratic Party — having consistently expressed reservations about tightening the comprehensive real estate tax and capital gains tax on non-resident single-home owners — observers say some scaling back of the proposed increases appears inevitable.

On Friday, Kim posted on social media that while he broadly agreed with the government's direction on real estate tax reform, the proposed tax increase on non-resident single-home owners needed to be supplemented.

"The real estate tax reform proposal requires detailed discussions on the premise that we broadly agree with its direction," he said, adding that "a significant number of middle-class single-home non-residents exist across the country." He said the government should "particularly bear in mind" the potential ripple effects that tax changes for this group could have on the jeonse and monthly rent market.

On the proposed overhaul of the capital gains tax long-term holding special deduction, Kim said eliminating the holding-period deduction for non-resident single-home owners "amounts in effect to a tax hike for non-resident owners of homes valued above 1.2 billion won — which covers most apartments in Seoul." He said concerns had been raised that the measure "could cause side effects such as forcing tenants out."

Kim also called for revisions to the comprehensive real estate tax changes. "Even if the current system is kept as is, the tax burden on non-residents will naturally increase as publicly assessed prices rise," he said, suggesting that "it might be worth considering whether simply raising the basic deduction for owner-occupiers to 1.4 billion won would be sufficient."

He added that "it is also undesirable for jointly held spousal property to be treated differently from sole ownership, whether the owner is a resident or not," and said the party would "gather input from the public, experts and the opposition and work through ruling-party consultations to revise and refine the details."

Voices within the Democratic Party have also called for limiting the increase in the comprehensive real estate tax burden. Some Democratic Party lawmakers representing Greater Seoul constituencies are said to be arguing that the tax burden cap should remain at the current 150 percent rather than be raised to the government's proposed 200 percent, citing concerns about a sharp jump in tax liabilities.

Kim is expected to hold ruling-party consultations in the near future to discuss revisions to the real estate tax reform package. The key sticking points are expected to be how far to adjust the comprehensive real estate tax deduction for non-resident single-home owners, the capital gains tax long-term holding special deduction, and the comprehensive real estate tax burden cap.