[Why&Next] Patchwork 'Jongbuse'... What Will Happen Next Year?

Agreement to Exclude Heavy Tax Rate on Two-Home Properties in Regulated Areas up to 1.2 Billion Won
Ruling and Opposition Parties Finalize Differences on Amendment

[Asia Economy Reporters Minyoung Kim and Hyunju Lee] Taxpayers who received the comprehensive real estate tax (종합부동산세, 종부세) bills amid this year's sharp decline in housing prices are expressing strong dissatisfaction. Although the government announced measures to ease the 종부세 burden to appease the public sentiment, confusion persists due to frequent changes in the calculation criteria. The market points out that the tax base should be flexibly managed according to the situation while maintaining consistency in 종부세 administration.

[Image source=Yonhap News]

◆Exemption criteria for multi-homeowners set at ‘tax base under 1.2 billion KRW’... Tentative agreement between ruling and opposition parties= According to the government and the National Assembly on the 22nd, the ruling and opposition parties have tentatively agreed on most of the contents of the 종부세 law amendment bill submitted by the government. In September, the government submitted a 종부세 law amendment bill to the National Assembly that lowers the 종부세 rates and expands the basic deduction amount. The tax rates, which were 0.6~3% for single-homeowners and 1.2~6% for multi-homeowners with two or more homes, will be unified to a single rate of 0.5~2.7%. Additionally, the basic deduction amount excluded from the tax base will be raised from 1.1 billion KRW to 1.2 billion KRW for single-homeowners, from 600 million KRW to 900 million KRW for multi-homeowners, and from 1.2 billion KRW to 1.8 billion KRW for jointly owned single homes by couples.

A notable point is that multi-homeowners with three or more homes will also be exempt from heavy taxation if their combined tax base is under 1.2 billion KRW. Previously, a tax rate of 1.2~6% was applied, but if the combined tax base of the homes is under 1.2 billion KRW, the same tax rate as single-homeowners (0.5~2.7%) will be applied. However, to have a tax base under 1.2 billion KRW, the combined publicly announced price must be 2.4 billion KRW or less. This means that homeowners who own multiple houses each priced under 100 million KRW will see a significant reduction in their 종부세 burden next year. Especially, homeowners in regions outside Seoul and the metropolitan area, where housing prices are relatively lower, are expected to benefit.

The point where the ruling and opposition parties showed disagreement until the last moment is the highest tax rate imposed on three-homeowners and multi-homeowners with a tax base over 1.2 billion KRW. The Democratic Party of Korea agrees with the government's amendment bill but insists that the highest tax rate should reflect the Democratic Party's opinion and be set at 5%.

To ease the tax burden, the fair market value ratio, which was lowered to 60% this year, was not fixed for next year. Although housing prices have fallen, the 종부세 burden remains almost at last year's level, and the government does not want to repeat the worsening public sentiment toward 종부세 seen this year. A Ministry of Economy and Finance official said, "The fair market value ratio can be adjusted by enforcement decree within the range of 60~100%, so it will be applied flexibly depending on the real estate market situation," adding, "The fair market value ratio to be applied for next year's 종부세 calculation will be finalized around June to July, before the November bill issuance."

종부세 is calculated by multiplying the tax base by the tax rate. The tax base is determined by multiplying the amount after subtracting the basic deduction from the publicly announced price by the fair market value ratio. The lower the fair market value ratio, the lower the tax burden.

◆종부세 unable to reflect market conditions... 2,000 people filing constitutional lawsuits= The government took action on 종부세 due to worsening public sentiment. This year's housing price decline is expected to be the largest since the 1998 financial crisis. According to the Korea Real Estate Board's nationwide housing price trend survey, apartment prices nationwide fell by 4.7% (cumulative) from January to November this year. This is the largest decline since the Korea Real Estate Board began related surveys in 2003.

In this situation, the number of 종부세 taxpayers this year reached 1.22 million, a 31% increase from the previous year, and the number of single-homeowners paying 종부세 due to rising publicly announced land prices also increased to 230,000. Taxpayers express frustration that the publicly announced land prices as of January 1, before the full-scale housing price decline, were used as the tax base. This year's publicly announced prices for apartment complexes rose by 17.2% compared to last year.

Moreover, as housing prices have recently plummeted in many areas, the publicly announced prices and actual transaction prices have reversed, intensifying taxpayers' tax resistance. According to Suojae, which is leading the constitutional challenge against 종부세, as of the 21st, about 2,000 taxpayers have participated in the constitutional lawsuits against 종부세. Last year, there were 5,500 participants, but this year, the enthusiasm has somewhat cooled following the government's announcement of 종부세 burden relief measures.

A Suojae official criticized, "Most participants are elderly, and there is a large time gap between the 종부세 amount determination date and the publicly announced price assessment date, so it does not properly reflect market conditions," adding, "The setting of the fair market value ratio is also done in a way that resembles a shell game."

In fact, 종부세, first introduced during the Roh Moo-hyun administration in 2005, has undergone patchwork amendments every time the government changed. Since real estate determines public sentiment, regardless of left or right administrations, 종부세 has been frequently amended as part of real estate policies. After its introduction, the Lee Myung-bak administration introduced a basic deduction of 900 million KRW for single-homeowners in 2009 to reduce taxes.

On the other hand, the Moon Jae-in administration raised the heavy taxation rate for multi-homeowners by more than double to curb real estate speculation. As housing prices surged rapidly and heavy taxation was imposed simultaneously, complaints erupted everywhere. Meanwhile, in line with the ‘smart one home’ philosophy, the basic deduction amount for single-homeowners was raised to 1.1 billion KRW. After the Yoon Suk-yeol administration, which advocated for abolishing 종부세, took power, the ruling and opposition parties have applied patchwork measures to reduce the tax burden, making 종부세 a complicated tax to understand. Even with the same property value (based on publicly announced prices), the 종부세 amount can differ by tens of millions of KRW. The Yoon administration included various tax relief measures in the economic policy direction announced the day before, fully reflecting a tax reduction stance.