[Tax Story] Non-Taxation and Capital Gains Tax for First-Generation Single-Home Owners

Baek Jeheum, Lawyer at Kim & Chang

The July 10, 2020 real estate measures, which sequentially came into effect to stabilize the housing market by strengthening tax burdens at the acquisition, holding, and transfer stages of housing, are expected to bring significant changes to capital gains tax on single-home ownership per household. For a single-home household, if the home has been held for more than two years and the actual transaction price does not exceed 900 million KRW (high-priced home threshold), full tax exemption benefits are granted. Even for high-priced homes, a special deduction for long-term holding (special deduction) of up to 80% of the capital gains, considering inflation, is applied. Previously, the capital gains tax rate on housing was 40% for holdings under two years and 50% for holdings under one year, with an additional surtax of 10% for two-home owners and 20% for owners of three or more homes. However, the above real estate measures have significantly changed the application requirements for the special deduction and the capital gains tax rates for short-term holdings and multi-home owners. Additionally, it is noteworthy that pre-sale rights, which were previously excluded from the count of homes, are now included in the calculation of multi-home ownership, similar to move-in rights.

In the July 10 real estate measures, first, a residency requirement was added to the special deduction conditions for single-home households, greatly reducing the benefit. Previously, an 8% annual deduction rate was applied based on the holding period, but with the addition of the residency requirement, it changed to 4% per year for holding and 4% per year for residency, effectively halving the deduction rate for non-residents. The August 2, 2017 real estate measures added a two-year residency requirement as a non-taxation condition for single-home households in all of Seoul and some parts of Gyeonggi Province designated as regulated areas; this residency requirement has now been introduced into the special deduction as well. Furthermore, the capital gains tax rates for short-term holdings were increased by 20%, applying a 70% rate for holdings under one year and 60% for holdings under two years. The surtax rates for multi-home owners were also increased by 10%, requiring two-home owners to pay an additional 20% and owners of three or more homes an additional 30%. To encourage quick sales, the residency and pre-sale rights provisions apply to transfers from January 1, 2021, and the tax rate changes apply to transfers from June 1, 2021. Ultimately, even for 'single-home households,' the residency period requirement added as a non-taxation condition for regulated area homes has now been introduced into the special deduction conditions, pre-sale rights are included in the count of homes, and capital gains tax rates for short-term holdings have been significantly increased, drastically reducing the scope and degree of tax benefits. This represents an all-out pressure on capital gains tax for single-home households.

The non-taxation of single-home households has been in place since the introduction of the capital gains tax system in 1975, sharing its history with the capital gains tax system. The purpose of non-taxation for single-home households is to stabilize the housing life of the middle class and low-income earners and to guarantee the constitutional freedom of residence and movement. A household refers to a group formed with family members. A household must consist of the resident and their spouse to prevent couples from forming separate households by dispersing their resident registrations. However, if the spouse has died or divorced, if the resident is over 30 years old, or if the resident can independently maintain their livelihood by managing and maintaining housing or land with income above a certain level, they are recognized as a single household even without a spouse. A home refers to a building used for residence and land within five times the building's settled area. In cases where two homes temporarily exist due to residence relocation, inheritance, or marriage, non-taxation benefits for single-home households are exceptionally granted if certain conditions are met. However, for a household that owned two homes and transferred one to receive non-taxation benefits, the holding period of the remaining home is calculated from the date it became a single home, not from the original acquisition date, which requires attention.

Many issues have been raised regarding the current non-taxation of single-home households and capital gains tax on housing. First, since the benefit is granted based on the number of homes rather than their value, a person who owns one home worth 900 million KRW and sells it receives the non-taxation benefit, but a person who owns three homes worth 100 million KRW each and sells one may have to pay capital gains tax. The current tax system, which determines taxation or non-taxation based on the number of homes rather than their size or value, is criticized for violating the principles of fairness and ability to pay. The concept of household (世帶), which is difficult to find in overseas legislation, grants non-taxation benefits only to single-home households, encouraging multi-home owners to separate households through divorce or children moving out, which is criticized as contrary to constitutional values protecting marriage and family life. Defining the non-taxation effect based on holding period in an all-or-nothing manner causes unintended lock-in effects by delaying sales to meet holding period requirements despite the occurrence of transfer reasons. Moreover, uniformly imposing residency requirements on special deduction conditions fails to consider unavoidable reasons for residence relocation and does not allow sufficient elapsed time, undermining taxpayer trust. Also, not recognizing the inflation adjustment function of the special deduction for single-home households is considered excessively harsh.

People marry, have children, support parents, and live their entire lives with varying numbers and scales of home ownership and transfers, so regulating this with a uniform standard in tax law is unreasonable. It is necessary to consider methods such as converting capital gains from non-taxed home transfers into mileage to set lifetime non-taxation credit limits, giving taxpayers the choice of tax units?individual, couple, or household?or increasing the number or value of non-taxed homes proportionally for larger families to promote tax fairness. Even if multiple homes are held, if there are reasonable grounds and the combined value or capital gains are below a certain amount, granting non-taxation benefits equivalent to single-home households would be more reasonable. To achieve the national housing policy goal of stabilizing the housing market and to realize constitutional freedoms of residence and movement and protection of marriage and family life, a comprehensive review of the single-home household taxation system is needed at this time.