South Korea's real estate tax reform: Shifting from property count to value, and the political calculus of the 'Comprehensive Real Estate Holding Tax Alliance'

South Korea's government is undertaking a significant overhaul of its real estate tax policies, moving beyond minor adjustments to a fundamental redesign of the comprehensive real estate holding tax (종부세). The core of this reform involves shifting the tax's basis from the number of properties owned to their monetary value. This strategic pivot aims to solidify the tax's character as a wealth tax, thereby enhancing vertical equity by increasing the burden on those with higher asset values.

Previously, the system blended property-specific local taxes based on the benefit principle with individual-based national taxes grounded in the ability-to-pay principle. It also functioned as a regulatory tool against multiple property ownership. This led to an anomaly where individuals owning two lower-value homes in provincial areas could face higher taxes than someone owning a single, ultra-high-value home in Seoul. The current reform rectifies this by prioritizing asset value, a change comparable to the earlier shift in property tax basis from area to value.

Furthermore, the reform introduces stricter limits on capital gains for owners of a single high-value home. This measure is designed to curb the concentration of assets in "one excellent house" (똘똘한 한 채), a phenomenon where individuals benefit significantly from holding and selling a single luxury property in Seoul. The revised policy clearly signals a preference for actual residency: the basic deduction for primary homeowners has been raised to 14 billion won, while that for non-resident homeowners has been lowered to 900 million won. This implies that those wishing to benefit from tax advantages must reside in their properties, and owners of ultra-high-value homes or those who do not reside in them will face a greater tax burden. This could potentially suppress demand in the high-end Seoul housing market and contribute to market stabilization.

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The current comprehensive real estate holding tax blends property-specific local taxes based on the benefit principle with individual-based national taxes grounded in the ability-to-pay principle. It also functions as a regulatory tool against multiple property ownership. This leads to an anomaly where individuals owning two lower-value homes in provincial areas can face higher taxes than someone owning a single, ultra-high-value home in Seoul.

The political economy surrounding this tax revision, particularly the concept of a "Comprehensive Real Estate Holding Tax Alliance," raises questions about its impact on the coalition of beneficiaries and those bearing the burden. The primary beneficiaries appear to be single-home owners residing in apartments valued between 2 billion and 3 billion won (based on official prices of 1.2 to 1.4 billion won), due to the increased basic deduction. However, the calculation is not straightforward, as non-resident homeowners may face increased burdens, especially concerning long-term holding special deductions. The author argues that the increased tax burden for non-resident homeowners goes beyond mere "incidental disadvantages" or "psychological deprivation," as these individuals were part of the original alliance. Treating them solely as speculators is problematic, given the varied reasons for non-residency.

The author cautions that if the number of people pushed out of the alliance due to increased tax burdens exceeds the number of new entrants, the legislative momentum will falter. Denying long-term holding special deductions entirely to non-resident homeowners conflicts with the principle of capital gains taxation. While reducing excessively high deduction rates is justifiable, especially for ultra-high-value homes where deductions can amount to billions of won, the current structure warrants revision. The goal of curbing the "one excellent house" phenomenon could be achieved by capping the deductible capital gains without altering the residency requirement. Unlike labor income, capital gains are realized at a single point in time after accumulating over many years. Applying progressive taxation as if it were annual labor income is unreasonable. The current tax code already employs methods like the "annual-cumulative" system for retirement income to mitigate such irrationality. Policy judgments favoring actual residency should not override the fundamental principles of capital gains taxation.

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The policy clearly signals a preference for actual residency: the basic deduction for primary homeowners has been raised to 14 billion won, while that for non-resident homeowners has been lowered to 900 million won. This implies that those wishing to benefit from tax advantages must reside in their properties, and owners of ultra-high-value homes or those who do not reside in them will face a greater tax burden.

A critical issue with the reform is the excessive disparity between preferential treatment and disadvantages based on specific asset ownership types. Past real estate policies have shown the adverse effects of such designs. For instance, the outright ban on mortgages for homes exceeding 1.5 billion won inadvertently pushed up prices of homes just below that threshold. Similarly, designating certain districts in Gangnam as areas requiring land transaction permits led to price increases in adjacent areas. This "paradox of pinpoint regulation" is likely to manifest in the current tax reform as well. The significant benefits concentrated on apartments in a specific price range (2 to 3 billion won) may not eliminate the "one excellent house" phenomenon but rather incentivize a shift towards that price bracket.

Another factor that could shake the Comprehensive Real Estate Holding Tax Alliance involves the reaction of those participating in the jeonse (long-term lease with a large deposit) market. The Lee Jae-myung administration's real estate policies have consistently emphasized actual residency, exemplified by the expansion of land transaction permits to all of Seoul to curb speculative "gap investments." If the comprehensive real estate holding tax and capital gains tax are also reorganized around residency requirements and implemented sequentially within one to two years, homeowners seeking to meet residency criteria will likely expedite their move-in plans. This could lead to a reduction in available jeonse properties. The author draws a parallel to the "tactical error" of the previous Moon Jae-in administration's three housing laws, which, despite their legitimate intentions, destabilized the relatively stable jeonse market and triggered rapid price increases due to reduced supply. This instability eventually spilled over into the sales market. The author questions whether the current reform can avoid a similar outcome.

During periods of price increases, higher holding tax burdens naturally intensify taxpayer resistance. When the fair market value ratio, tax rates, and tax burden limits all move simultaneously, the burden is maximized. The article ends abruptly here.

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If the number of people pushed out of the alliance due to increased tax burdens exceeds the number of new entrants, the legislative momentum will falter. Denying long-term holding special deductions entirely to non-resident homeowners conflicts with the principle of capital gains taxation.