"Why Reduce Taxes for Speculative Properties?"... Will the Long-Term Special Deduction for 'Smart Single Homes' Be Revised?

President Lee Targets Single-Home Investment Owners
"Tax Deductions for Non-Residential Single Homes Are Unusual"
Capital Gains Tax May Rise if Long-Term Deduction Is Revised

President Lee Jae-myung has hinted at the possibility of reconsidering the long-term ownership special deduction (commonly known as the "long-term special deduction") for homeowners who do not reside in their only property, drawing close attention from the market. He has strongly indicated his intention not to grant tax reductions for "investment properties" that are not used as primary residences, even if the owner has only one home.

On January 23, President Lee stated on the social media platform X, "It seems odd to grant tax deductions for long-term ownership if the property is for speculation rather than residential use, even for those with only one home, let alone multiple homeowners." He added, "The long-term ownership special deduction is effectively blocking more properties from coming onto the market and encouraging speculation." He further remarked, "If we are inevitably forced to revise the tax system, it would only be fair to treat non-residential and residential properties differently."

President Lee Jae-myung. Photo by Yonhap News

The long-term ownership special deduction is a system that allows a portion of capital gains to be deducted if a property is held for a certain period. Under the current system, a single-homeowner household can receive a deduction ranging from a minimum of 24% to a maximum of 80% of capital gains, depending on the holding and residence period. If the property is held and occupied for more than three years, the deduction is 24%; for more than five years, it is 40%; and for more than ten years, up to 80% of the capital gains tax can be reduced.

President Lee's recent remarks are interpreted as reflecting the view that owning a non-residential property is, in itself, a form of speculation. Previously, during a New Year's press conference on January 21, he also commented, "It seems strange to reduce taxes simply because someone has held investment or speculative real estate for a long time." This suggests that even if someone owns only one home, purchasing a property through methods like gap investment without actually residing in it can be considered a form of speculation.

With President Lee repeatedly addressing the long-term special deduction, the market perceives that a revision of the system is becoming more likely. If the deduction rate is lowered, the capital gains tax burden on single-homeowners will effectively increase, which is why the market is paying close attention to these developments.

Some have suggested differentiated deduction rates based on the amount of capital gains. Previously, the Democratic Party considered a plan in its 2021 tax reform proposal to adjust the long-term special deduction by capital gains brackets. Under this plan, the deduction rate for the residence period (40%) would remain unchanged, but the deduction for the holding period would be applied as follows: 40% for capital gains of 500 million won or less, 30% for 500 million to 1 billion won, 20% for 1 billion to less than 2 billion won, and 10% for 2 billion won or more. However, this proposal did not pass the National Assembly due to criticism that it would excessively increase capital gains taxes.

However, some point out that even if the system is revised, there are limits to how much it will increase the supply of properties for sale. If tax benefits are reduced even after meeting the holding and residency requirements, there is little incentive to sell. This is especially true for high-priced homes, which are likely to yield large capital gains upon sale, making owners even less inclined to sell.

Song Seung-hyun, CEO of Urban & Economy, said, "Capital gains tax is ultimately a tax you don't have to pay if you simply hold onto your property without selling it. While the supply of lower-priced homes may increase somewhat, homes in prime locations are likely to be held onto, leading to a polarization of available properties by price range."

There are also projections that this could lead to an increase in property gifting, especially for homes in prime locations. Song added, "Currently, there are significant restrictions on purchasing, such as loan regulations, limitations on gap investments, and requirements for actual residence. As a result, it is likely that more owners of high-priced homes will choose to wait rather than sell, eventually opting to gift their properties instead."