What’s the calculation?The road map on real estate policy from the ruling Democratic Party (DP) has gone astray. After it proposed to levy the comprehensive real estate tax on the “top 2 percent” of the property-rich, it came up with another controversial idea of scaling back special deductions for a single homeowner depending on the lengthy period of residence. If the change in capital gains tax that passed the party convention on June 18 becomes final, even a single-home owner would have to pay hefty taxes for selling a long-held home.
Although such sale has no speculative motivation, a long-time homeowner would be subject to more capital gains tax than before, if their home value went up. The decision ignores the rule of the thumb in taxation, where if ownership taxes go up, taxes for sale and purchase should go down to ensure fairness and security in the housing market.
Real estate taxation has become nightmarish after both trade and ownership taxes were sharply raised under the Moon Jae-in government. After raising taxes on multiple home owners, it now is out to collect more taxes from single homeowners. Does the ruling front wish to discourage people from outright owning a home by imposing heavy taxes on excess as well as just one?
According to a projection by Shinhan Bank, if an owner sells a 97-square-meter (1,044-square-foot) apartment after living in it for nearly 10 years, capital gains tax would currently come to 48.25 million won ($42,000). But under the DP outline, the tax would jump to 74.27 million won. Meanwhile, when a 95-square-meter apartment is sold after living in it three years and five months, the capital gains tax is 126.4 million won now, but lesser at 107.7 million won under the DP methodology. Who would agree with higher taxes for living longer in one home?
The policy has become so muddy because of politicization of real estate policy. The DP has come to overlook the rationale for special deductions for long-time homeowners. The deduction rate was institutionalized in 2009 as a tax incentive for people who live in one home for a long time, lessening volatility in the market. When a single-home owner lives in the same space for 10 years, an 80 percent deduction is offered regardless of the capital real estate deals.
The DP has feigned to lower capital gains tax by lifting the threshold for capital gains tax exemption for homes valuing 1.2 billion won from the current 900 million won. But if capital gains exceed 500 million won, the special deduction rate for long-time owners would come down to maximum 50 percent from the current 80 percent. The rationale is that the owner of a home should cough out the gains if property value shot up over the years. Who would hold onto a home long if they risk facing higher taxes? The DP must stop with experiments and come up with a convincing outline.