Gov’t measure trims taxes on rental income

In a move to ease the tax burden on homeowners who rent out properties, the government announced yesterday it will apply a single tax rate of 14 percent on rental income of up to 20 million won ($18,678), starting in 2016.

The Ministry of Strategy and Finance came up with the measure in support of its earlier plan to increase tax benefits for tenants and owners of two houses to boost the rental market.

Previously, income from rents were included in the comprehensive income taxation system, which applied higher rates.

Now, those earnings will be separated from the comprehensive tax.

For this year and next year, those earnings will be exempt from taxation as a temporary measure before the implementation of separate taxation.

Additionally, the government has raised the tax deduction for rental income from 45 percent to 60 percent. At least 4 million won of a homeowner’s annual earnings from rent will always be exempt from taxation.

This new taxation will be applied to both monthly and long-term jeonse, or lump-sum contracts, from 2016.

Those who earn more than 20 million won in rental income will still be taxed under the comprehensive income tax rule, but owners of houses valued at 300 million won or less will be excluded.

According to a scenario by the government, the owner of a jeonse house with a deposit between 300 million won and 400 million won will have to pay 98,000 won in tax. Deposits between 400 million won and 500 million won will be levied at 190,000 won. For deposits 1 billion won or above, the tax will be more than 680,000 won.

The National Tax Service will collect data on housing contracts made in 2013 to start giving the tax benefit from this year.

The government said separation of the tax will not increase the tax burden on consumers.

According to the government’s calculations, a homeowner who rents out one house and earns 12 million won a year by receiving 1 million won in rent every month currently pays 150,000 won as income tax. Under the new measure, the amount will be reduced to 110,000 won.

But the application of the same taxation on landlords of jeonse houses could raise issues.

Given that jeonse prices of apartments in Seoul and neighboring areas are 300 million won and up, the latest change in the taxation system is likely to add new burdens on those who have more than two houses and currently enjoy the runaway jeonse trend.

“Homeowners don’t care about their tax bill, but they do care about whether or not they pay the tax,” said a realtor in Jamwon-dong, Seocho District, one of most expensive areas to live in Seoul. “They might raise jeonse deposits to offset new taxes.”

“The taxation on jeonse deposits may be a chance to accelerate expansion of the monthly rental market,” said Park Won-kap, a real estate expert at KB Kookmin Bank.

BY SONG SU-HYUN [ssh@joongang.co.kr]