Reconstruction Excess Profit Burden, 'Abolition Rumors' Even Before Imposition

Minister Park Sang-woo Raises Possibility of Abolishing Capital Gains Tax on Repeated Home Sales
Market Also Says "It Should Be Abolished to Expand Housing Supply"

The possibility of 'abolishing' the relaxed "Act on the Recovery of Excessive Profits from Reconstruction" (재초환법) is being raised less than two weeks after its implementation. Such remarks from the ruling party and government ahead of the general election contrast with the 2022 Yoon Seok-yeol administration's first housing supply policy announcement, which emphasized that "there will be no abolition or suspension of 재초환."

The government’s suggestion of the possibility of abolishing 재초환 came from Park Sang-woo, Minister of Land, Infrastructure and Transport. On the 2nd, during a meeting with the press at the Government Complex Sejong to mark his 100th day in office, Minister Park said, "We are considering whether to completely eliminate 재초환 or further relax it." He pointed out that due to recent construction cost increases, it is difficult to make profits from reconstruction as before, which reduces the effectiveness of the system.

Some candidates running in the general election are also supporting the abolition of 재초환. Representatives include Kim Eun-hye (Gyeonggi Seongnam Bundang-eul) and Shim Jae-cheol (Gyeonggi Anyang Dongan-eul) from the People Power Party. Candidate Kim repeatedly expressed her determination during field campaigns to "abolish 재초환, which was created and implemented by the Democratic Party."

재초환 is a system that recovers taxes when the profit per member from reconstruction projects exceeds an average of 80 million KRW. It was introduced in 2006 during the Roh Moo-hyun administration but was suspended due to reasons such as the real estate market downturn and revived in 2018 under the Moon Jae-in administration. Since then, it has been criticized as the biggest obstacle to reconstruction projects, leading the current government and opposition parties to struggle for over a year to revise the exemption threshold (from 30 million KRW to 80 million KRW or less). At that time, the government showed a willingness to ease the system rather than abolish or suspend it.

Although voices calling for the abolition of 재초환 have grown, it is expected that reconstruction complexes where the system will actually apply will emerge by the end of August at the latest. According to current law, basic local governments must impose charges within five months after the enforcement date. Since the revised 재초환 law came into effect on the 27th of last month, local governments have been busy calculating the charges for reconstruction complexes in their jurisdictions.

However, as Minister Park mentioned, with rising construction costs and a prolonged high-interest rate environment, it is anticipated that the relaxed 재초환 will have limited impact on revitalizing the reconstruction market. Additionally, taxation on 'unrealized gains' remains a subject of controversy.

Experts also see the abolition of 재초환 as necessary. Lee Eun-hyung, a research fellow at the Korea Institute of Construction Policy, said, "If 재초환 is significantly adjusted, it will positively affect the momentum of redevelopment projects," adding, "There is a need to discuss improving the system toward abolition to achieve the policy goal of expanding housing supply."

Ham Young-jin, head of the Real Estate Research Lab at Woori Bank, also said, "Of course, it is better to have no regulation than to have it." However, he analyzed that the warming of the reconstruction market may be limited regardless of the necessity of abolition. He elaborated, "In promoting reconstruction, market conditions, business conditions, and institutional changes play important roles, but the capacity to bear these varies by region."

However, sufficient public discussion and social consensus are required to abolish 재초환. The bill must pass through the National Assembly, and currently, the ruling party has a history of failing to overcome opposition from the opposition parties even when it held the majority in the past. Sung Tae-yoon, Policy Chief of the Presidential Secretariat, appeared on KBS 1TV's 'Sunday Diagnosis' on the 24th of last month and said, "It is true that abolishing 재초환 would help (the projects), but some degree of social consensus must be reached," adding, "It is problematic to exempt taxes or charges on capital gains generated solely for the real estate market."