[Real Estate A to Z] The Magic of Rural Houses Without Capital Gains Tax Surcharge

Rural residential area landscape (Photo by Asia Economy DB)

[Asia Economy Reporter Ryu Tae-min] This year, the lifestyle of living five days in the city and two days in the countryside, known as ‘5do2chon,’ has gained popularity, drawing attention to rural houses used as weekend homes. If certain conditions are met, even a single household owning two houses is exempt from the capital gains tax surcharge and the house is excluded from the total number of houses when calculating the comprehensive real estate tax (종부세).

A rural house refers to a building located in rural or semi-rural areas where long-term residential living is possible. To be recognized as a rural house, the property must be located in an eup or myeon outside the Seoul metropolitan area (Seoul, Gyeonggi, Incheon) or in a city with a population under 200,000. It must not be located in land transaction permission zones, regulated areas, speculative zones, or tourist complexes. This explains the recent popularity of rural houses in high-demand areas such as Hongcheon and Hoengseong in Gangwon-do.

Additionally, at the time of acquisition, the combined standard market price of the house and its associated land must be 300 million KRW or less (400 million KRW or less for hanok, traditional Korean houses). Typically, the standard market price is about 80% of the actual transaction price. At the end of July, the government raised the price limit for applying capital gains tax special cases on rural and hometown houses from 200 million KRW to 300 million KRW through a tax reform plan.

According to Article 99, Paragraph 4 of the Restriction of Special Taxation Act, if a single household owner acquires a rural house by the end of this year and holds it for three years thereafter, they will not be subject to the capital gains tax surcharge even if they dispose of their previously owned house. This provision was initially introduced in August 2003 and was supposed to last only until 2008, but the expiration date has been extended several times, now set until the end of 2022.

One advantage is that the three-year holding requirement for rural houses is a post-fulfillment condition. This means that if a household owns house A and then purchases rural house B, selling house A before the three years have passed does not trigger the capital gains tax surcharge. However, the owner must complete the three-year holding period for rural house B; if B is sold before the period ends, the capital gains tax surcharge exemption previously granted for house A must be paid. After the three-year holding period, capital gains tax is exempted when disposing of house A.

The order of transactions is also important. If a household already owns a rural house and becomes a single-household owner, then acquires a general house and later disposes of the general house, the capital gains tax surcharge exemption does not apply. Also, even if the rural house is unregistered, the special tax treatment can be applied if the house being sold is a registered asset.

Meanwhile, the government is also considering excluding rural houses with a standard market price of 300 million KRW or less from the comprehensive real estate tax calculation. This is interpreted as allowing single-household owners to retain the comprehensive real estate tax benefits even if they purchase an additional local house.