South Korea Considers Changes to Long-Term Property Tax Deduction; Inherited Homes' Status Questioned

South Korea's government is reportedly considering revisions to the long-term holding special deduction (Jangteukgongje) for capital gains tax, with proposals expected in the tax reform package due at the end of July. President Yoon Suk-yeol has previously raised concerns about the current system, which provides tax breaks for properties held for extended periods, even if not occupied by the owner.

The Jangteukgongje system, established in 1989, aims to reduce the tax burden on individuals selling property after holding it for at least three years. It allows for a portion of the capital gains to be deducted from the taxable amount. Initially designed to protect long-term homeowners during periods of rapid price increases, the system has undergone several modifications. Notably, a 2005 revision excluded multi-homeowners from the deduction, while a 2009 adjustment increased the maximum deduction for single-homeowners up to 80%. Since 2021, the deduction has been split into 'holding' and 'residency' components, requiring actual residency for the maximum benefit.

For single-homeowners who have resided in the property for at least two years, the deduction is calculated at 4% per year for both holding and residency, totaling up to 80% for 10 years of each. For general properties, the deduction is 2% per year for holding, capped at 30% after 15 years. However, the deduction is not applicable for properties held less than three years, unregistered sales, overseas properties, or homes in designated speculative zones sold by multi-homeowners. Properties purchased from other union members are also excluded.

A key point of discussion is the calculation for inherited properties. While the holding period for calculating the deduction begins from the date of inheritance, the holding period for determining the capital gains tax rate starts from the date the deceased originally acquired the property. This distinction is crucial for those planning to sell inherited homes. The upcoming tax reform proposals will clarify the specifics of these changes, including the effective date and any grace periods, which homeowners should monitor closely.