President Lee Jae-myung's remarks on Tuesday outlining the direction for revising the long-term holding special deduction are expected to send shockwaves through the property market. Under the current system, single-home owners who meet both the 10-year holding requirement (40%) and the 10-year residency requirement (40%) receive a maximum deduction rate of 80% on their taxable base. If holding deductions are reduced and residency deductions are raised as the president suggested, homeowners who rented out their properties without meeting the 10-year residency threshold will face a significantly heavier tax burden. The overhaul could also shrink the current 80% maximum deduction rate or limit the top rate to owners who have resided in the home for more than 10 years.
Capital gains tax burdens are expected to rise immediately for single-home owners who have lived in their properties for less than 10 years when they sell. According to an analysis conducted for The Seoul Economic Daily by Woo Byung-tak, a senior expert at Shinhan Bank's Premier Pathfinder, and tax accountant Ko Hyun-sik, an owner who acquired Mapo Raemian Prugio Apartment in Seoul for 1 billion won ($720,000) 10 years ago, lived there for three years, and sold it for 2.57 billion won would currently be subject to a capital gains tax of around 140 million won after a 52% deduction rate is applied. However, if the system is revised so that the holding-period deduction is cut to 0% and the residency-based deduction is raised to a maximum of 80% (8% per year), the total deduction rate would fall to 24% and the tax burden would jump to around 250 million won. In simple terms, excluding various expenses, the tax burden increases by about 110 million won. In an extreme case where the holding-period deduction is eliminated entirely and only the residency-based deduction remains at its current maximum of 40%, the total deduction rate would fall to 12% and the capital gains tax would surge to nearly 300 million won.
The tax burden increase is even larger for high-end apartments in Seoul's Gangnam area. For Banpo Raemian Firstige, assuming the property was acquired 10 years ago for 2 billion won, lived in for three years, and sold for 5 billion won, the current capital gains tax of approximately 468 million won would rise to approximately 780 million won (based on 0% holding deduction and 80% residency deduction), an increase of more than 310 million won.
"Because the tax burden tied to residency period will grow going forward, even single-home owners who already meet non-taxation requirements will need to carefully decide whether to reside further before selling or dispose of the property before the overhaul, particularly if the sale price exceeds 1.2 billion won," Ko said.
The government maintains that residency-focused taxation will curb speculative demand and protect genuine homebuyers, but the market views ripple effects such as reduced jeonse supply and locked-up listings as inevitable. Seo Jin-hyung, a professor of real estate law at Kwangwoon University, warned, "If residency period becomes the key factor, landlords who had rented their properties on jeonse may choose to move back in, which could ultimately reduce jeonse listings. Reduced supply could paralyze market transactions and trigger side effects such as a surge in jeonse prices."
Some argue that criteria for non-resident homes should be established before the overhaul. Kwon Dae-joong, chair professor of economics and real estate at Hansung University, said, "When the long-term holding deduction is revised, single-home owners who bought a property but could not live in it for various reasons and rented it out on jeonse could suffer disadvantages, so criteria for non-resident homes should be set first. Even if the holding deduction is reduced, the residency deduction should be expanded to maintain the current overall deduction level, or policy acceptance will decline."
Critics also point out that the president's successive remarks on taxation could cause market confusion contrary to his intent. Lee had previously hinted at overhauling the long-term holding deduction several times through Facebook posts and cabinet meetings.
"The president may view it as communication with the public, but tax officials effectively see it as a guideline and have no choice but to revise the long-term holding deduction accordingly," said Ahn Dong-hyun, an economics professor at Seoul National University. "When tax law is amended to fit a specific direction, blind spots and unintended victims inevitably emerge, so it is necessary to wait until the authorities complete a carefully designed policy on the long-term holding deduction."
