[Why the Government] What Is the Comprehensive Real Estate Holding Tax... Can It Cool Down the Overheated Real Estate Market?

President Moon Jae-in Orders "Top Priority on Comprehensive Real Estate Tax Increase"
After Unusual Surge in Sales and Jeonse Market Post 6·17 Measures, Receives Emergency Report from Minister of Land
Professor Lee Joon-gu Says "Positive Effect of Appointment System Near Zero... Tax Exemptions May Reach Up to 10 Trillion Won"

[Sejong=Asia Economy Reporter Kim Hyunjung] President Moon Jae-in has once again brought out the 'Comprehensive Real Estate Holding Tax' card. After the announcement of the June 17 real estate measures, housing sales and jeonse prices surged sharply in some areas, prompting him on the 3rd to urgently instruct his Blue House aides to prioritize the revision of the comprehensive real estate holding tax law as the top task for the 21st National Assembly. Why did the president himself hasten to mention strengthening the comprehensive real estate holding tax, which is always referred to as the 'last card' in real estate regulation measures?

◆What is the Comprehensive Real Estate Holding Tax? = First, let's look at what kind of tax the comprehensive real estate holding tax is. It is a holding tax levied on the excess amount when the combined publicly announced price of housing or land per individual exceeds the deduction amount by type. Focusing on housing, which is always controversial, taxation applies when the publicly announced price exceeds 600 million KRW, and as a kind of protection for actual users, the deduction amount is set at 900 million KRW for one household with one house. Also, this tax is classified as a national tax, so local governments cannot arbitrarily reduce or alter it.

The concept of the comprehensive real estate holding tax itself appeared in 2005 during the Roh Moo-hyun administration to respond to the surge in real estate prices. The now common 'joint ownership by spouses' for houses also began to be used as a way to avoid tax burdens through individual aggregation of the comprehensive real estate holding tax from that time. There was an attempt to change this to aggregation by household, but it was ruled unconstitutional during the Lee Myung-bak administration in 2008, so it was ultimately settled as individual aggregation. The comprehensive real estate holding tax is a tax item with a history, evaluated as having played a role in the regime change to the Lee Myung-bak government because it increased the burden on homeowners but failed to stabilize real estate prices. While it can impact the overall market, the government must endure strong resistance, so it is always called the 'last card' in real estate policy. This is even more so now that the median price of apartments in Seoul has exceeded 900 million KRW.

Taxes are calculated based on the fair market price, not the actual transaction price or market price. The publicly announced price is the price investigated, calculated, and announced by the government, generally about 30-40% lower than the market price. The government announced at the end of last year a plan to raise the realization rate of the publicly announced price up to 80% for the most expensive houses (market price over 3 billion KRW) under the policy that the more expensive the house, the higher the realization rate. This is why homeowners, who should be happy when house prices rise, resist when the publicly announced price increases, demanding it be lowered.

How much comprehensive real estate holding tax is collected annually? According to the Ministry of Economy and Finance's final total revenue and expenditure results, last year, 2.6713 trillion KRW was collected, an increase of 798.5 billion KRW (42.6%) compared to 1.8728 trillion KRW in 2018. The biggest factor was the sharp rise in house prices during this period. The government's real estate stabilization measures, which raised tax rates and realization rates, ultimately increased tax revenue as they coincided with rising house prices.

[Image source=Yonhap News]

◆If 'rental business special privileges' remain, effectiveness ↓= The comprehensive real estate holding tax law revision, which President Moon emphasized as the top priority for the 21st National Assembly, was included in the December 16 real estate measures last year but failed to pass the 20th National Assembly and was carried over to the 21st. This revision aims to raise tax rates, increasing the general tax rate from 0.5-2.7% to 0.6-3.0%, and for owners of three or more houses or two houses in regulated areas from 0.6-3.2% to 0.8-4.0%, raising the maximum by 0.8 percentage points. It also includes a plan to raise the tax burden cap for two-house owners in regulated areas from 200% to 300%. On the other hand, it proposes a relaxation by increasing the deduction limit from 70% to 80% for long-term elderly owners with one house.

However, even if this revision passes, the industry consensus is that it will be difficult to achieve significant market effects. One of the biggest obstacles is the existence of gap investors and 'rental business operators' who were officially granted tax privileges by the government in 2018, such as exclusion from capital gains tax surcharges, exclusion from comprehensive real estate holding tax aggregation, and exclusion from long-term holding special deductions. The tax avoidance channels directly prepared by the government to induce stable housing supply (where jeonse prices do not rise sharply) from the private sector are difficult to counter with tax strengthening. Professor Lee Jung-gu of Seoul National University's Department of Economics even described these tax benefits for rental business operators as a 'flower path of speculation' and a 'cancer.'

On the 3rd, Professor Lee also posted on his Facebook that even with an extremely low assumption (average house price 100 million KRW, comprehensive real estate holding tax rate 1%), about 15 trillion KRW is being reduced through the rental business registration system for the approximately 1.5 million houses owned by rental business operators. Considering that the houses they own are unlikely to be priced at 100 million KRW and that the tax rate for multiple houses in Seoul can rise to 3.2%, the scale could reach up to 10 trillion KRW, according to his estimate. He pointed out, "The problem is why such enormous tax expenditure benefits are given to rental business operators," adding, "The positive effects of the rental business registration system are almost zero. The government is effectively giving up trillions of won in tax revenue to maintain a system with no real benefit."

The possibility that the holding tax burden will be passed on to tenants is also a concern. Registered rental business operators have a limit on rent increases (within 5%), but if not registered, landlords can raise rent to shift the tax burden. The government is expected to respond by promoting amendments to the Housing Lease Protection Act (the '3 Lease Laws'), including rent caps, but these also face controversies over property rights infringement. Considering the complex cases and peculiarities of the rental and lease market, it seems impossible to cover all scenarios institutionally. The issue of tenants being decided on a first-come, first-served basis or purely by luck in rental housing provided by rental business operators, which receive tax benefits and have some public supply characteristics, and the price decoupling from rental housing supplied by non-rental business operators are also cited as market-distorting factors. Ultimately, the 'order' that builds the rental market becomes even more tangled and confused.

However, it seems unlikely that the government will admit policy failure and retroactively overhaul benefits related to rental business operators. Minister Kim Hyun-mi said on the 30th of last month at the National Assembly Budget and Accounts Committee that in response to independent lawmaker Lee Yong-ho's question about whether past real estate policies had failed, "No. Policies are all working comprehensively."