Global Approaches to Capital Gains Tax: Owner-Occupancy vs. Long-Term Holding

The recent discussions surrounding President Yoon Suk-yeol's potential overhaul of the long-term holding special deduction for capital gains tax have brought this crucial issue to the forefront. As reported by our colleagues at Newsis, a deep dive into international tax systems reveals a diverse landscape of approaches to taxing property gains.

In countries like the United Kingdom and France, the emphasis is heavily placed on whether the property was owner-occupied. The UK's Private Residence Relief (PRR), for instance, offers tax reductions proportional to the period of owner-occupation, provided strict conditions are met. France goes further, exempting capital gains entirely if the property was the primary residence, and even offers a 6% annual deduction for non-primary residences after six years, with full exemption after 22 years. Germany also provides tax benefits for owner-occupiers and exempts gains on properties held for over 10 years.

Conversely, nations such as the United States and Japan primarily distinguish between short-term and long-term capital gains. The US taxes gains on properties held over a year at lower rates (0-20%) and offers significant exemptions for primary residences. Japan employs a tiered tax rate system, with higher rates for properties held less than five years and lower rates for those held longer, including a reduced rate for holdings exceeding 10 years and below a certain gain threshold. This focus on holding period, irrespective of occupancy, contrasts sharply with the owner-occupancy focus seen in Europe.

Our analysis, drawing from the research by the National Assembly Budget Office, highlights that while South Korea, Japan, and Germany significantly reward long-term ownership, and the US differentiates by holding period, South Korea's system stands out for its complexity. The interplay of heavy taxes on multiple homeowners and short-term holders, exemptions for single homeowners below a certain value, and the extensive special deduction based on both holding and residency periods creates a convoluted framework. As the research suggests, a fundamental restructuring is needed to enhance consistency in long-term holding deductions and potentially ease the excessive surcharges on short-term gains, making the system more coherent and equitable for homeowners.

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There is a need to restructure the system by reorganizing the surcharge system for multiple homeowners, increasing the consistency of the long-term holding deduction, and easing the excessive surcharge rate on short-term holding.