Will Taxes as the "Last Resort" Make Apartment Rental Business Operators the First Target?[Real Estate AtoZ]

Registered Rental Apartments May Face Heavy Capital Gains Tax
Adjusting Excessive Benefits Targeting Multiple-Home Owners...Lawsuits Possible

President Lee Jaemyung pointed out on the 9th that the current regulation excluding registered rental housing from the heavy capital gains tax on multiple-home owners constitutes an excessive preferential benefit. He specifically criticized the fact that, unlike other tax benefits such as the comprehensive real estate holding tax that disappear once the mandatory rental period ends, the exemption from the heavy capital gains tax for multiple-home owners is maintained indefinitely.

Since late last month, President Lee's series of real estate messages on social networking services (SNS) have been targeting multiple-home owners. His underlying intent is that, while he will not prohibit people from owning several homes they do not live in, they should bear responsibilities commensurate with that ownership and that any "abnormal" benefits should be removed.

The President's "proposal" to reconsider the excessive benefits for registered rental housing differs from his earlier remarks. As an example, President Lee suggested a plan under which the heavy capital gains tax would be excluded only for a certain period, such as 1 to 2 years after deregistration, but thereafter taxes would be levied at the same level as on ordinary multiple-home owners. He also said it would be possible to apply such a measure only to apartments.

Apartment near Gwacheon Station in Gwacheon-si, Gyeonggi-do. Yonhap News

To implement such a plan, revisions would be needed to the Restriction of Special Taxation Act or to the Enforcement Decree of the Income Tax Act. If the system is adjusted to reflect the President's intentions, it would be the first overhaul of the tax system. In the case of the previously decided heavy capital gains tax on multiple-home owners in designated adjustment areas, the Yoon Suk Yeol administration had been granting one-year extensions of its sunset clause, but now it is simply allowing the original schedule to take effect.

This means that, unless the government or the legislature took separate action, the heavy capital gains tax on multiple-home owners was structurally set to be automatically reinstated. Although President Lee stepped forward and declared that the system would operate normally again starting in May, strictly speaking, it is difficult to regard this as the current administration's own "creation."

On real estate policy, President Lee has consistently maintained the principle that "taxation is the last resort." He repeatedly emphasized this point whenever he discussed the direction of real estate policy, both during his campaign in the 21st presidential election and after his inauguration at official meetings and roundtables. His argument has been that, since taxes are a means of securing national finances, using them for other purposes such as stabilizing housing prices is bound to create side effects.

President Lee Jaemyung is preparing for a meeting of senior presidential secretaries at the Blue House on the 12th. Photo by Blue House press pool photographers, Yonhap News.

The government is carrying out an overhaul of the tax system across the board in relation to real estate transactions and ownership. While it has not disclosed specific details, it has only announced the basic direction that an inter-ministerial task force will review the matter based on the results of commissioned research. The government plans to design a rational tax reform plan that will both channel funds into productive sectors and fully take into account the principle of ability-to-pay and public acceptability. If benefits for rental business operators are to be adjusted, such changes are expected to be pursued separately as a one-off measure, independent of this broader tax reform.

Even if public opinion is largely in favor of adjusting what is seen as an overly generous level of capital gains tax benefits for registered rental housing, reflecting this sentiment in the system is considered a different order of challenge. This is because reducing existing benefits is bound to provoke strong backlash from those affected. Under the previous Moon Jae In administration, when newly built apartments were excluded from eligibility for registration as purchase-type rental housing, some rental business operators filed constitutional complaints, citing infringement of property rights and damage to policy credibility. The Constitutional Court ruled the measure constitutional.

An official at a local government said, "In the case of registered rental housing, various tax benefits were granted on the grounds of constraints such as limits on rent increases during the mandatory rental period," and added, "Unlike other measures recently discussed, this would involve the government's active will, so if it is actually pursued, there is a possibility that rental business operators could resort to collective action."