With President Lee Jae Myung again publicly raising the long-term holding special deduction for capital gains tax granted to single-household single-home owners, attention is turning to how the government will proceed. Many criticize that the deduction is structured to confer larger benefits on higher-priced homes and therefore should be overhauled, but there are also concerns that abolition could dampen transactions through ‘lock-in of listings’ and the like, prompting calls to redesign the entire real estate tax system, including property holding tax·acquisition tax.

On the 18th, on X (X), the President said of the deduction, “a system that drastically reduces capital gains tax merely because of long-term holding regardless of whether one resides there,” adding, “If a person bought a home not to live in but to make money and the price rose, the tax is naturally due on that profit, so why should it be slashed drastically just because it was held for a long time”.

Under the current Income Tax Act, the long-term holding special deduction allows a single-household single-home owner who sells a home over 1.2 billion won after owning and residing for 10 years or more to deduct up to 80% of the capital gain, reducing the taxable amount. If such an owner has held a home over 1.2 billion won for at least three years and resided for at least two years, the deduction combines the holding period (4% per year) and the residence period (4% per year) and applies up to a maximum of 80% (with 10 years of holding·residence).

A bill to overhaul the deduction has been introduced in the National Assembly. Ten lawmakers, including Representative Yoon Jong-oh of the Progressive Party and Representatives Lee Gwang-hee and Lee Joo-hee of the Democratic Party, jointly proposed on the 8th an amendment to the Income Tax Act that would abolish the deduction and, when a home held for at least three years is transferred, grant a lifetime per-person tax credit of 200 million won. Rather than deducting a fixed percentage of the capital gain as at present, the idea is to switch to a flat structure that directly subtracts a set amount from the computed tax. However, the Democratic Party has stated there is as yet no official intention to push this at the party level.

The lawmakers who took part in the introduction argued that because the current deduction is regressive and favors owners of high-priced homes with large capital gains, it worsens the so-called one smart home problem. The sponsors said, “Since the deduction grants tax relief as a fixed percentage of the capital gain each time a home is bought and sold, the more one keeps moving up into higher-priced homes and realizing bigger gains, the greater the benefit received, which is a regressive problem,” adding, “We aim to switch to a tax credit method to reduce excessive benefits for high-priced homes and normalize the real estate market.”

If the amendment proceeds as written, the tax burden on single-household single-home owners is expected to rise sharply for higher-priced homes. By contrast, analyses suggest that for mid to lower priced homes of 1.5 billion won or less, the burden could instead decline.

According to a simulation by Woo Byung-tak, a specialist with Shinhan Bank Premier Pathfinder, for a home with a transfer price of 4 billion won (acquisition price 2 billion won·10 years of holding·residence assumed), the capital gains tax under current law is 94.06 million won, but under the amendment it would be 399.22 million won, an increase of over 300 million won. By contrast, when the transfer price is 1.5 billion won (acquisition price 700 million won·10 years of holding·residence), the current tax of about 3.48 million won could effectively become 0 after applying the 200 million won cap on the tax credit under the amendment.

Experts agree on the need to pare back the deduction, but caution that it should be addressed together with other real estate taxes such as property holding tax·acquisition tax to mitigate market shock. This is because the heavier tax burden could instead produce ‘lock-in of listings,’ where owners are unable to sell.

Park Hoon, a professor in the Department of Taxation at the University of Seoul, said, “Given the issue of regressivity and the like, switching the deduction from a percentage basis to a flat amount is positive,” but added, “If the system is not designed with consideration for home price increases driven by inflation and harmony with acquisition tax·property holding tax, the act of buying and selling homes itself could become difficult.”

Kim In-man, head of the Kim In-man Real Estate Economy Research Institute, said, “If excessive benefits are the problem, the focus should not be solely on the long-term holding special deduction but on the balance of the entire tax system,” adding, “It is necessary either to recognize property holding tax as deductible necessary expenses against capital gains tax, or to raise the current 1.2 billion won exemption threshold for capital gains tax by the rate of inflation.”