Adjustment of rental income tax announced

In yet another move to keep the real estate market from falling back into its many-year funk, the government, in agreement with the ruling Saenuri Party, has decided to tinker with the taxation of rental incomes.

The Ministry of Strategy and Finance and the Ministry of Land, Infrastructure and Transport said yesterday that in a meeting with lawmakers from the ruling party they decided to widen the scope of landlords who will be liable to pay a 14 percent income tax on rental income announced earlier this year.

The 14 percent tax rate was applied to landlords with two or less units and who made 20 million won ($19,596) or less annually from rental income.

Under the new rule, the tax rate will apply no matter how many residential units are owned by the landlord.

But the 20 million won ceiling will be maintained on rental income. Income above that amount will be taxed at regular income tax rates.

In addition, the implementation of the tax has been pushed back from 2016 to 2017.

In February, the government announced a series of measures to “advance the local housing rental market.”

There were several goals. Encouraging more monthly rentals as opposed to Korea’s traditional jeonse, or long-term deposit, system was one. Another was to bring rental income into the tax net, because in the past it went untaxed.

But the overarching goal was to get the real estate market out of its long-term gloom in general.

The measures included tax credits for tenants living in rentals and a new flat tax on landlords’ rental income.

In the earlier plan, the 14 percent flat tax rate was only applied to landlords who own two apartments or less and with rental income of less than 20 million won. Rental income for landlords who own more than two was taxed at the comprehensive income tax rate no matter how much it was. The comprehensive income tax rate is between 6 percent and 38 percent. However, the 6 percent rate only applies to those whose total income is less than 12 million won.

In the earlier plan, anyone who rented out a residential unit worth 900 million won or more would be taxed 6 percent to 38 percent on the income regardless of how much it was.

As of the agreement yesterday, that income will be taxed at 14 percent.

In the past, the very idea of taxing rental incomes was considered taboo and the government shied away from it, especially in respect to landlords who aren’t rich and whose only income is from renting out their homes.

Traditionally, Koreans have heavily been dependent on real estate investment as their retirement plan. Many of the homeowners live on the income that they receive from the rents after retirement.

According to the industry, more than 60 percent of Korea’s population has a housing unit in their name. And more than 40 percent of those residential units are rented out in some form or other.

Although renters with more than three housing units can be subject to income tax, the tax was technically voluntary. And a landlord has to receive 300 million won in a jeonse deposit to be liable for tax. But after the announcement in February, the real estate market, which was finally thawing from a long deep freeze, started to contract again.

Market analysts said although the government’s tax plan made basic economic sense, confidence in the market was so weak that it scared people away from either buying or selling apartments.

BY lee ho-jeong [ojlee82@joongang.co.kr]