President Lee Jae-myung and the ruling Democratic Party are sending mixed signals on scrapping the long-term holding special deduction for real estate capital gains tax. Kang Jun-hyun, chief spokesperson of the Democratic Party, said Tuesday that "the party has not reviewed any tax reform at all" regarding the abolition of the long-term holding deduction. President Lee on the 18th of this month proposed a six-month grace period and phased abolition, saying, "Why should we give a massive tax cut just because someone held a property for a long time, when they don't even live there?" Some lawmakers in the ruling bloc, including the Democratic Party, have already introduced a bill that would abolish the long-term holding deduction benefit for single-home owners and allow only a "lifetime tax credit capped at 200 million won." With uncertainty surrounding how real estate taxes, including the long-term holding deduction and property holding tax, will change after the June 3 local elections, market confusion is a growing concern.
The current long-term holding deduction allows single-home owners to deduct up to 80 percent of capital gains (40 percent for holding period plus 40 percent for residency). If the government revises the system, only "residency" is likely to be recognized, with tax benefits for mere "holding" eliminated. President Lee said tax benefits would be maintained for actual residential single-home owners who temporarily reside elsewhere due to work or other reasons. But critics point out that distinguishing between speculative and genuine demand is not easy, meaning some homeowners could end up being unfairly penalized. Moreover, if the long-term holding deduction is abolished, the capital gains tax burden will increase correspondingly, making it harder to move to another home at the same price. This could trigger a "listing freeze," worsen the jeonse and monthly rental market, and provoke tax resistance.
Real estate tax reform, which affects the majority of the public, requires careful coordination between the ruling party and the government. Yet the Democratic Party has also drawn a line on the strengthened property holding tax for owners of high-priced single homes mentioned by President Lee, calling it "a matter that has not been finalized." If such discord continues, policy effectiveness will diminish and market distrust will grow.
If tax reform is necessary to root out real estate speculation, the reasonable approach is to lower transaction tax burdens while raising holding taxes, as the Organisation for Economic Co-operation and Development (OECD) has recommended to the Korean government. Abolishing the long-term holding deduction, which increases the burden on housing transactions, requires caution given its various side effects. Above all, the fundamental solution for housing stability for ordinary citizens is sufficient supply. The Moon Jae-in administration's focus on demand suppression through tax hikes and lending restrictions, which only fueled a surge in home prices, should serve as a cautionary lesson.
