Four Months Ahead, Lee Says "No Extension of Capital Gains Tax Exemption for Multi-Home Owners"...Concerns Over Supply Shortage After Reinstatement [Real Estate AtoZ]

Grace Period for Heavy Capital Gains Tax on Multi-Home Owners Ends in May
Capital Gains Tax Rate for Three-Home Owners to Reach Up to 75%
Tax on 1 Billion Won Gain for Three-Home Owners More Than Doubles
Short-Term Spike in Listings Expected, But Supply Crunch Feared After Grace Period
"Start by Selling Properties With Lower Capital Gains"

As President Lee Jaemyung publicly announced that he is "not considering any extension of the capital gains tax exemption for owners of multiple homes, which expires on May 9," the calculations for the 1.28 million multi-home owners in the Seoul and Gyeonggi regions alone have become more complicated. While there may be a temporary increase in properties for sale until the end of the grace period for the heavy taxation, analysts warn that after the exemption ends, there could be a significant decrease in supply due to various factors such as land transaction permit zones and high interest rates.

On January 23, the market interpreted President Lee's remarks as an intention to encourage multi-home owners to list their properties before heavier taxes are imposed, thereby increasing supply. On the same day, President Lee stated on X (formerly Twitter), "The special deduction for long-term ownership is blocking supply and encouraging speculation." This signals his determination to no longer offer tax benefits for properties held for investment purposes, even if they have been owned for a long time.

The heavy capital gains tax for multi-home owners adds 20 percentage points to the base tax rate for those with two homes, and 30 percentage points for those with three or more. The base tax rate ranges from 6% to 45%, depending on the taxable amount. Since May 2022, the government has temporarily suspended the heavy capital gains tax, and during this period, the higher tax rate was not applied regardless of whether the property was in a regulated area. The special deduction for long-term ownership, which reduces capital gains tax by up to 80% for properties held for over 10 years, is also applied according to general regulations.

When the heavy capital gains tax is reinstated, owners of three or more homes could face tax rates as high as 75%. For example, if a two-home owner sells a property purchased for 1 billion won after holding it for 10 years and sells it for 1.5 billion won, the capital gains tax would increase from 133.6 million won to 273.1 million won. For those with three or more homes, the tax would rise from 133.6 million won to 322.85 million won, more than doubling. If a property purchased for 1 billion won is held for 15 years and sold for 2 billion won, the tax for a two-home owner would increase from 257.55 million won to 580.35 million won. Under the same conditions, a three-home owner's tax would rise from 257.55 million won to 682.8 million won.

Concerns Grow Over Deepening Supply Shortage After May 9

Given the potential for a tax shock for multi-home owners, it is expected that some of their properties will be listed on the market before May. However, the prevailing analysis is that after the grace period ends, the sharp drop in supply could fuel further price increases.

Kim Hyosun, Chief Real Estate Specialist at KB Kookmin Bank, explained, "Many properties owned by multi-home owners have already been listed, but as the sunset date approaches, efforts to sell may accelerate. To sell properties that have not yet been traded, there must be a price advantage compared to alternatives, so we may see more price-adjusted listings."

Some analysts believe that the announcement of the end of the exemption came too late to have a substantial effect. Kim Jaekyung, Head of Toomee Real Estate Consulting, said, "If the announcement had been made around December last year, more urgent sales would have come to the market, helping to stabilize it. Now, there is not enough time to sell, and more effort is required for a quick sale. Price increases after May 9 could become even steeper."

Ahn Sungyong, Real Estate Specialist at NH Nonghyup Bank, commented, "The short period remaining until May, high interest rates, and land transaction permit zones are all variables. The increase in supply the government expects may not materialize. In the past, those who made urgent sales at the end of the exemption period felt they suffered losses, so if properties are not listed after May 9, a transaction freeze or market distortion could worsen."

"Multi-Home Owners Should Sell Properties With Lower Gains First"

Yonhap News Agency

Experts unanimously advise that multi-home owners should quickly sell properties with lower capital gains in preparation for the end of the exemption. In the long term, the possibility of higher property holding taxes could also become a factor.

Kim Jaekyung stated, "When the heavy capital gains tax is reinstated, three-home owners will face a maximum tax rate of 75%, with an additional 10% local income tax, resulting in an effective tax rate of up to 82.5%. The priority should be to sell properties with smaller capital gains first, and to ensure that properties with larger gains qualify for tax exemptions. If the gains are similar, properties in outlying areas should be sold first."

Yang Jiyoung, Real Estate Specialist at Shinhan Premier Pathfinder, advised, "Holding taxes could also rise in the long term, so it is wise to focus on a single high-quality property. The strategy should be to quickly sell properties with smaller gains and hold onto those in prime locations."