Government Blocks Exit for Multi-Homeowners, Urges Selling... "Only Encourages Listing Freeze"

Despite Pressure from Capital Gains and Property Taxes on Multi-Homeowners... Sales Decrease While Gifts Increase
"Temporary Capital Gains Tax Relief Needed... Must Encourage Multi-Homeowners to Sell"

View of downtown apartment complexes from Namsan, Seoul

"They say if I sell my house now, I will pay 100 million won more in capital gains tax than before. The government keeps telling us to sell our houses, but if that's the case, shouldn't they make it possible for us to sell?"

The more than 30% surge in real estate gifts in the first half of this year is seen by the market as a clear sign of the government's major policy failure. While the government pressured multi-homeowners to sell their properties under the banner of 'clearing real estate corruption,' market participants have chosen gifting over selling. Experts diagnose that the decisive factor is the fear of the capital gains tax bomb, which can reach up to 82.5%. In particular, the gifting craze is further worsening the market's supply shortage. Transaction volumes are plummeting, and the scarcity of listings is becoming increasingly severe. There are calls to boldly open an exit for multi-homeowners through temporary capital gains tax relief.

◆ "If I'm going to sell, I'd rather just gift it" = The market points to the capital gains tax hike implemented on June 1 as the catalyst for the real estate gifting boom. According to the 'Ownership Transfer Registration (Gift) Application Donor Status' data from the Court Registry Information Plaza, the rush to gift before June is clearly visible. The number of donees, which was around 31,000 at the beginning of the year, increased to 44,412 in March ahead of the capital gains tax hike in June, peaked at 50,706 in April, and remained large at 47,377 in May. In June, when the capital gains tax was strengthened, the number dropped back to 31,132, similar to early-year levels. Since selling a house before June requires contracts 1-3 months in advance, a flood of tax-avoidance listings appeared.

Earlier in June, despite many predicted side effects and controversies, the government implemented the capital gains tax hike as planned. The capital gains tax rate for multi-homeowners in regulated areas increased by 10 percentage points from the previous rate. For a three-homeowner selling their first house with a capital gain exceeding 1 billion won, the tax rate including local income tax reaches 82.5%. For a two-homeowner selling an apartment purchased for 1 billion won, the capital gains tax increased from 332.16 million won to 403.52 million won, an increase of about 71 million won. For a three-homeowner selling a house bought for 890 million won at 1.8 billion won, the capital gains tax rose from 617.6 million won to 723.5 million won.

◆ Listings turning to gifts... a market running dry = As a result, not only apartment sales but also monthly rent and lease transactions are drying up. According to the Korea Real Estate Board's monthly apartment transaction data, last month Seoul's apartment sales (based on reporting date) were 4,240, down 16.7% from 5,090 the previous month. Ko Jun-seok, adjunct professor at Dongguk University Law School, explained, "Due to the increase in real estate transaction taxes, multi-homeowners chose gifting instead, resulting in fewer listings." He added, "Along with new supply, multi-homeowners are key suppliers in the market, but if their hands and feet are tied by capital gains tax, listings will inevitably be locked up."

◆ Experts say "Regulatory easing needed to bring out listings" = Nevertheless, the government and ruling party continue to pressure multi-homeowners with tax measures. They are tightening regulations such as abolishing tax benefits for rental business operators and reducing the long-term holding special deduction for capital gains tax on multi-homeowners. The ruling party, in particular, drastically reduced the long-term holding special deduction rate for single-homeowners through the 'Partial Amendment to the Income Tax Act.' They announced this law would apply from January 2023, warning multi-homeowners to dispose of their properties by the end of 2022. This is interpreted as an attempt to open an exit and induce listings in the market.

However, experts believe this will only backfire. They say it is still difficult to sell given the already high capital gains tax. Experts agree that now is the time for regulatory easing rather than tightening. Cho Ju-hyun, professor of real estate at Konkuk University, said, "Contrary to the policy intention to punish speculators, ordinary people are suffering," adding, "Capital gains tax hikes should be temporarily suspended to enable active transactions by genuine buyers."

Seo Jin-hyung, president of the Korea Real Estate Society (professor at Gyeongin Women's University), said, "For real estate market stability, it is urgent to bring out listings from multi-homeowners," and "Capital gains tax must be drastically lowered for listings to appear." Professor Ko also said, "Listings locked up by the capital gains tax bomb are being transferred through gifting," adding, "Lowering transaction taxes is necessary to bring listings that would otherwise be gifted back into the sales market."