Gov’t proposes sharp hike to real estate tax
“The government decided to announce the comprehensive real estate tax reform before announcing the tax code revision for next year [which would include amendments for other types of taxes], considering public interest and the possible impact it could have on the market,” said Kim Dong-yeon, Korea’s finance minister and deputy prime minister for the economy, at a press briefing on Friday at the government complex in central Seoul.
“The reforms will rationalize the cost of real estate ownership over the long term, compelling the public to make more reasonable investments. This will ultimately contribute to the sound development of the real estate market.”
The measures announced by the Finance Ministry were based on recommendations released by a presidential commission earlier this week, though the proposal featured some slight changes. The Finance Ministry will submit the tax plan to the National Assembly on Aug. 31, and if it passes a vote, it will go into effect starting next year.
The comprehensive real estate tax is a national tax levied on owners of multiple properties and more expensive real estate, and it is widely considered to be a tax on the wealthy. In 2016, about 2 percent of Korea’s 13.31 million property owners, or 274,000 people, paid the comprehensive real estate tax. It is separate from the property tax levied by local governments.
To start, the government will push up the taxable portion of property value by five percent per year for the next two years.
Currently, the taxable portion is set at 80 percent of a property’s government-assessed value. The government will increase this rate to 90 percent by 2020. The commission initially advised the government to raise the taxable portion by 5 percent per year but did not set a specific ceiling for the increase.
In addition to increasing the taxable portion of property value, the government will also raise the comprehensive tax rate on more expensive homes.
The commission previously recommended that the government push up the tax rate by 0.05 to 0.5 percentage points for an apartment valued at more than 600 million won ($537,000). The government will impose a steeper increase, which will range from 0.1 to 0.5 percentage points.
As a result, some owners of just one property will see their comprehensive real estate tax bill rise by as much as 32 percent, depending on the price of their property.
If a person owns an apartment with a government-appraised value of 1.2 billion won, their tax burden will get heavier by 50,000 won, or 6.7 percent, from 750,000 won this year to 800,000 won next year. For a unit appraised at 3.5 billion won, tax bill will rise from 13.57 million to 17.9 million, a 4.33 million won hike, or 31.9 percent, according to the Finance Ministry’s estimate.
The Finance Ministry said that, because wealth in Korea is heavily concentrated in real estate, the increase will make the country’s taxation policy much fairer.
According to the ministry’s data, about 75 percent of Koreans’ total assets were non-financial assets in 2017, most of which was in real estate. The proportion for the United States was 34.8 percent and for Japan it was 43.3 percent, according to the Finance Ministry.
The government also went ahead with the commission’s recommendation that the government impose tougher taxes on owners of multiple homes. The ministry introduced a 0.3-percentage point tax rate increase on owners of multiple homes whose combined value exceeds 600 million won.
A person who owns three apartments that are each valued at 1 billion won would face a comprehensive tax increase of nearly 65 percent.
However, a person who owns one apartment valued at 3 billion won would see their comprehensive tax bill rise by just 31 percent.
The ministry’s calculations indicate that the comprehensive tax increase on owners of multiple homes will increase by as much as 75 percent, although the current regulation limits property tax growth to 150 percent of the previous year.
A person who owns three or more properties worth a total of 3.5 billion won would, in theory, see a comprehensive tax increase of 74.8 percent, from 15.76 million won to 27.55 million won. But because of the 150 percent limit, the increase would be capped at 63 percent in the comprehensive tax, or a 9.99-million-won hike.
“The government’s intent is to have more homeowners register as landlords with rental businesses,” explained Kim Byung-kyoo, the deputy minister for tax and customs. ”They will be exempt from the comprehensive real estate tax if they do so.”
The Moon Jae-in administration has been pushing owners of multiple homes to register as landlords to improve the transparency of real estate transactions and increase the availability of homes for the general public, with the aim of ultimately lowering Korea’s cost of living.
“Passive income earners, such as retirees, will still receive a tax deduction of as much as 70 percent of their comprehensive tax bill to minimize their tax burden,” said Kim.
Market analysts explained that the government decided to raise the tax burden on owners of one expensive property, especially in the wealthy Gangnam District of southern Seoul, in an attempt to combat Korea’s polarized housing market.
The Finance Ministry predicted that, under the new plan, about 350,000 people will be subject to the revised tax code.
It expects the government’s revenue from the comprehensive real estate tax to balloon by 742.2 billion won next year, up about 60 percent from last year.
Ko Hyoung-kwon, the first vice minister of strategy and finance, explained that the reform will increase Korea’s ratio of real estate tax revenue to its gross domestic product from 0.8 percent in 2015 to 1 percent by 2022, nearing the Organization for Economic Cooperation and Development average of 1.1 percent.
According to the deputy minister for tax and customs, the government is also planning to lower the real estate transfer tax next year to encourage property sales, although no details on the plan were released at the briefing.
BY CHOI HYUNG-JO [email@example.com]