Much-abused landlord tax loophole is investigation target
Housing rental businesses are the target of a task force seeking to weed out individuals who use the structure to gain certain tax benefits.
When property owned by an individual is registered as a business, it is exempt from the comprehensive real estate tax.
The joint investigation, which includes the Ministry of Land, Infrastructure and Transport and other relevant agencies and departments, will begin in July. The joint investigation is the first of its kind as government monitoring of these businesses have been lax so far.
Violators can be fined 30 million won ($24,800).
In addition to the comprehensive tax exemption, properties rented by business entities receive credits for capital gains taxes and can make business deductions against income earned.
To qualify for these special benefits, certain conditions must be met. The landlord signs contracts that run a minimum of four years, and rental increases must be capped at 5 percent a year.
A standard rent agreement must be used, and the property has to be used for housing.
It is not easy to spot violators as no systematic compliance mechanism is in place to verify whether the conditions have been met.
Since last year, the Land, Infrastructure and Transport Ministry has been preparing to create a system for keeping track of these businesses. It has also created a website for landlords who rent out apartments as businesses to inform them of their obligations.
In January, the government raised the fine against violators from 10 million won to 30 million won.
“There has been strong criticism that several landlords have enjoyed all the benefits while failing to keep their obligations,” said Choi Jung-min, head of the private housing rental policy division at the ministry. “We plan to take administrative action, including levying fines, this year through the joint investigation.”
Ahead of the investigation, the government is accepting voluntary reports by the landlords until the end of the month. Those who have only committed minor violations won’t be punished. Those who fail to meet obligations considered to be important, such as raising the rent more than 5 percent when renewing a contract, will still face fines even if they voluntarily turn themselves in.
The landlords are furious over the government’s crackdown, arguing that they were not fully informed about the conditions beforehand and have claimed that some of the standards that the government insists upon are ambiguous.
One such individual recently posted a petition on the Blue House website saying he or she has never been given a briefing on the 5 percent ceiling from either the local government or the tax office.
The landlords are especially frustrated with the ceiling. They argue that the law seemed to suggest that the rent could be raised 5 percent per year. Under this interpretation, at the end of a two-year rental contract, a 10 percent increase could be required for renewal.
The ministry argues that interpretations in January 2018 and new legislation in February 2019 made it clear that the limit is 5 percent upon renewal if no increases were made in previous years. The word “annual” was taken out of all related laws, including income tax and the comprehensive real estate tax laws.
“The fact that [the government] has changed all related laws recently means that there was a potential for misunderstanding,” said Choi Gwang-seok, lawyer at Winasia Law Firm. “It would be difficult to avoid getting fined if the Land Ministry conducts a sweeping
investigation. It seems there’s a lot of potential for controversy.”
Some argue that as the housing act was reformed in February last year, some increases should be grandfathered in, but the ministry has made it clear that the upcoming investigation will be strongly focusing on the 5 percent ceiling.
A real estate market expert, who requested anonymity, said if the government levies fines on rent contracts that were made before the legislative reform in February last year, there’s a strong possibility that landlords will file lawsuits, asking the court to cancel the government’s fines.
“As one is getting various tax benefits, the government investigation against those rental businesses is something that’s obvious,” said Kwon Dae-jung, real estate professor at Myongji University. “[The government] should correct ambiguous regulations while a system that allows the landlords to regularly check their obligations should be created.”