Part of an evolution

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Part of an evolution


Kim Sun-duk

South Korea’s real estate market is unique in several ways. Residential apartments are put up for sale before they are even constructed. The properties are rented out at fixed rates for two years in return for a hefty lump-sum deposit called jeonse. Jeonse served as the primary rent system in Korea as a precursor to buying a home.

But the share of jeonse contracts in the rental market has been decreasing since 2000. More and more homeowners prefer to rent out homes with smaller deposits and for monthly rent payments, as in the West. Although many are opting for monthly rents, demand for jeonse contracts will continue to exist.

In order to speed up the pace of transition in the market to monthly rentals, the government offered to provide tax deductions to tenants on their monthly rental fees. At the same time, it announced that it will levy more taxes on landlords’ income from monthly rents. A few days later the government additionally announced that it will exempt owners of two residences earning an income of 20 million won ($18,484) or less per year from monthly or long-term rents from current comprehensive income tax and instead levy a universal rate of 14 percent from 2016. Those earning more than 20 million won would be subject to the higher comprehensive levy.

The government quickly changed its mind and decided to levy the same taxation on income from jeonse to ensure fairness. Before, people renting out more than three residences on jeonse terms had been taxed. Deposits of less than 300 million won were excluded and homeowners had to pay 60 percent in taxes for any income of more than the sum. But because tax payment were voluntary, it remains unclear how many jeonse renters paid their taxes faithfully according to their income. Authorities were less aggressive in collecting taxes from rent yields considering they are primarily sources of income for retired people.

As of 2010, about 45.8 percent of housing in Korea was rented out. About 61.3 percent of people own homes, but just 54.2 percent live in them. The rental market is sizable and yet authorities dragged their feet on levying taxes on rental incomes. Taxation is now unavoidable because the National Tax Service will collect data according to a new act on rent levies. The measures are part of efforts to close the loopholes in the taxation system.

But authorities will have to be flexible in levying income from monthly and long-term rents. If the levies are not applied fairly, households will turn resentful and resistant. Thorough investigation on the actual rental prices and incomes should be carried out first. Authorities should re-examine whether the threshold for levies on jeonse deposits of below 300 million and smaller-scale residences are realistic. Now that the government set guidelines to tax homeowners on incomes from more than two rentals, it must ensure tax rates are fair according to the residential size, types and rental methods and continue to seek ways to promote the renting market. Translation by the Korea JoongAng Daily staff

JoongAng Ilbo, March 15, Page 32

*The author is the head of the Construction Industry Strategy Research.

BY Kim Sun-duk

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