[Practical Finance] "If You Can't Avoid It, Reduce It"... Use Joint Ownership for Comprehensive Real Estate Tax

From the end of November, comprehensive real estate tax (종부세) notices will be sent to taxpayers. 종부세, commonly known as a tax paid by the wealthy, has shown varying sensitivity to fluctuations in housing prices. There are also many calls for its abolition. The reason why tax-saving strategies for 종부세, under the motto "If you can't avoid it, reduce it," remain popular every year is clear. This year, 'joint ownership' tax saving stands out.

◆Comprehensive Real Estate Tax '0 Won' for Joint Ownership by Married Couples on Houses Valued Under 1.8 Billion KRW

Last year, about 1.2 million people received 종부세 notices, but this number is likely to decrease this year. The amounts are expected to decrease as well. In particular, married couples who jointly own one house can enjoy significant tax benefits. This is because the government raised the joint ownership 종부세 deduction amount from 600 million KRW each to 900 million KRW each (totaling 1.8 billion KRW).

Joint ownership refers to the concept opposite to sole ownership, where the ownership share of a house is divided and owned jointly. Currently, 종부세 is taxed on an individual basis, although it was previously taxed per household. However, in 2008, the Constitutional Court ruled that household-based taxation was unconstitutional as it conflicted with the clause mandating gender equality in marriage and family life. This ruling became a turning point for joint ownership to emerge as a representative tax-saving method.

At that time, for sole ownership, the 종부세 deduction amount was 900 million KRW, consisting of a publicly announced price of 600 million KRW plus an additional 300 million KRW deduction, while joint ownership allowed a total deduction of 1.2 billion KRW (600 million KRW per person), resulting in relatively lower tax burdens. Married couples owning apartments in Seoul's Gangnam area with publicly announced prices under 1.2 billion KRW did not need to worry about 종부세 when owning jointly.

Since then, as housing prices steadily rose, the situation changed. At the end of 2021, the government announced and implemented an amendment to the 종부세 law raising the tax threshold from 900 million KRW to 1.1 billion KRW. At the same time, it expanded tax credits for seniors and long-term holders, seemingly favoring sole ownership for additional tax savings. This is because tax credits are only available for sole ownership.

However, as claims that "joint ownership of one house is no different from sole ownership" grew stronger, if one of the two owners is designated as the taxpayer and applies for the one-householder special case, joint owners can also receive tax credits. Under current law, senior tax credits apply as follows: 20% for ages 60 to under 65, 30% for ages 65 to under 70, and 40% for ages 70 and above. For long-term holding tax credits: 20% for 5 to under 10 years, 40% for 10 to under 15 years, and 50% for 15 years or more. The combined limit of these two credits is 80%.

So, is applying for the special case always advantageous? The National Tax Service advised that one must consider the publicly announced housing price, age-based credit rates, and holding period tax credits. For example, if a married couple jointly owns a 2 billion KRW house (held for 13 years) with a 50-50 ownership share, each can deduct 900 million KRW, making it more beneficial not to apply for the one-householder special case. Without applying, the tax amount is 391,000 KRW, but if the special case is applied, the 종부세 rises to 682,560 KRW.

◆Maintaining the Fair Market Value Ratio at 60%? ... 종부세 Expected to Decrease Next Year as Well

Comprehensive Real Estate Tax Notice Ahead of Classification / Photo by Yonhap News

종부세 has fluctuated greatly depending on the administration. During the Moon Jae-in government, as real estate prices rose, many taxpayers faced 종부세 shocks due to the realization of publicly announced prices. In response, President Yoon Suk-yeol pledged during his presidential campaign to "ease the 종부세 burden" and, after election, lowered the fair market value ratio from 95% to 60%.

The government plans to maintain this level next year as well. They explain that although 종부세 rates have risen significantly, this is mainly due to a base effect and not because excessive benefits were granted. Previously, the fair market value ratio increased continuously: 85% in 2019, 90% in 2020, and 95% in 2021.

종부세 is calculated based on the publicly announced price announced every June and notified in November. As a result of lowering the fair market value ratio last year, the average 종부세 per one-householder decreased by 440,000 KRW. According to data received by Go Yong-jin, a member of the National Assembly's Planning and Finance Committee from the National Tax Service, the average 종부세 per one-householder was 1.09 million KRW, down 440,000 KRW (28.8%) from 1.53 million KRW in 2021. Additionally, reflecting this year's decline in publicly announced prices, the number of one-householder 종부세 taxpayers is expected to decrease by about 47% (approximately 110,000 people).