South Korea's property tax reform sparks debate over residency-based differentiation

South Korea's government has proposed a significant shift in property taxation, aiming to differentiate tax burdens for single-home owners based on whether they reside in the property. This move, part of the government's tax reform package announced on August 3, has ignited considerable debate among ruling party members and experts.

The core of the controversy lies in the proposed changes to the comprehensive real estate holding tax (종부세) and capital gains tax (양도소득세). For single-home owners, the government plans to raise the basic deduction for the holding tax from 12 billion won to 14 billion won (approximately $1.1 million to $1.3 million) for residents. However, for non-resident single-home owners, this deduction would be reduced from 12 billion won to 9 billion won. Furthermore, the long-term capital gains tax special deduction is set to be replaced by a "long-term residency special deduction," which would not apply to non-resident-owned homes.

Critics argue that these differentiated tax policies could destabilize the rental market. If non-resident single-home owners face higher tax burdens, they might choose to occupy their properties instead of renting them out. This could lead to a decrease in rental supply, potentially driving up rent prices and increasing the burden on tenants. The situation is compounded by the tenant's right to renew their lease, which can be nullified if the landlord intends to use the property for self-residence, leaving tenants in a precarious position.

Beyond market concerns, some experts question the fundamental fairness of the proposed tax structure. They argue that differentiating taxes based on residency, rather than on the actual value of the property or the capital gains realized, violates basic taxation principles that emphasize the ability to pay. "Differentiating the basic deduction based on residency for the same 1-home ownership, from 1.4 billion won to 900 million won, goes against the principle of taxation that assets of the same value should be taxed the same," stated Lee Sang-min, a senior research fellow at the Narsalim Institute. This approach, he contends, prioritizes policy objectives or political considerations over established tax principles.

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Differentiating the basic deduction based on residency for the same 1-home ownership, from 1.4 billion won to 900 million won, goes against the principle of taxation that assets of the same value should be taxed the same.