[Debriefing] Real estate tax reform

Real estate speculation has long been a contentious topic in Korea. Governments, particularly liberal ones, are keen to stop profiteering buyers from snapping up too many apartments in prime areas.

President Moon Jae-in’s government, emboldened by its victory in the June elections, has embarked on a campaign to raise the comprehensive real estate tax, which is aimed squarely at Korea’s wealthiest property owners. Here’s a primer on this controversial tax and the latest effort to increase it.

Q. What is the comprehensive real estate tax?

The comprehensive real estate tax is a national tax levied on owners of multiple properties and more expensive real estate. It is separate from the property tax levied by the local government.

Different versions of the tax also apply to vacant land and land used for industrial, business and agricultural purposes.

The tax was first proposed in October 2003 under the Roh Moo-hyun administration and was put into law in 2005. It applied to 70,000 apartment owners in its first year and that number jumped to 341,000 in 2006.

The goal was to suppress the real estate speculation that was driving up housing prices in the greater Seoul area, particularly in the capital’s three Gangnam districts in southern Seoul - Gangnam, Seocho and Songpa. During the Roh administration, the three districts saw their apartment values rise by an average of 80 percent.

However, when the conservative Lee Myung-bak took over in 2008, it eased the comprehensive tax which it said was punitive and irrational. It raised the cutoff for those required to pay the tax from 600 million won ($538,950) to 900 million won for owners of just one property.

When the comprehensive real estate tax was first introduced, some said that it would unfairly punish people who saw their home prices rise on their own and weren’t involved in real estate speculation. These sentiments resonated with retired people who lived in the same apartment in Gangnam for decades.

Q. How is the comprehensive real estate tax calculated?

Currently, the tax is levied on owners of multiple apartments exceeding 600 million won in total government-assessed value. However, for owners of only one property, the tax is levied when their real estate value exceeds 900 million won. The Ministry of Land, Infrastructure and Transport releases apartment values in April, and they are used to calculate the taxes.

The tax is also currently calculated separately by each member of a household. This means if a husband owns an apartment that worth less than 900 million won in government-assessed value and the wife owns an apartment valued less than 900 million won, they don’t have to worry about the comprehensive real estate tax.

During the Roh administration’s initial version of the tax, all property owned by family members regardless were combined under the tax. This was changed during the Lee administration in 2009. The comprehensive tax is also levied on land that has a combined value that exceeds 500 million won, and on commercial or office land space it goes into effect when the combined value of an owner’s properties exceeds 8 billion won.

The tax rate is between 0.5 and 2 percent and applies to the amount that an apartment exceeds 900 million won for owners of single properties and 600 million won for owners of multiple properties. The taxed amount is 80 percent of the government assessed value over that, which is also between 60 and 70 percent of the property’s market value. For land, the tax rate is between 0.75 and 2 percent, and for commercial properties it is between 0.5 and 0.7 percent.

According to the National Tax Service, last year 335,591 apartment owners paid the comprehensive real estate tax, 0.6 percent of the country’s 51.8 million people.

Q. Why is the government planning to raise this tax?

The Moon government strongly believes that owners of multiple apartments were driving up apartment prices to unaffordable levels while curtailing the housing supply. In a move to encourage owners of multiple apartments to sell off their properties, the Moon government levied heavier taxes on sales of multiple apartments. But as the market showed no signs of cooling off, so the government is now planning to raise the comprehensive real estate tax.

Koreans invest heavily in real estate compared to other advanced economies. According to a study by the Bank of Korea, non-financial assets, which are mostly made up of real estate, account for 75.8 percent of average Korean household’s total assets. In the United States, that ratio is 34.9 percent, Japan is at 43.7 percent and Britain 55.3 percent. Germany and France both have ratios above 65 percent.

There were 5,830 people who owned more than 11 homes in 2009, just 0.036 percent of the country’s population. However, by 2016, that figure had surged to nearly 25,000, or 0.091 percent of Koreans. The number of people who own between six and 10 housing units increased from 9,479 to 26,559 during the same period.

The government believes one of the main reasons people are buying multiple homes, even if they have to take out large loans to do so, is because of the relatively low tax burden.

Korea’s total property taxes are equivalent to 0.8 percent of the nation’s GDP, well below the 0.91 percent average of Organization for Economic Cooperation and Development nations.

Q. How is the tax going to be changed?

The committee reportedly decided on Thursday to go with a plan that will raise both the taxable portion of market value from the current 80 percent to 100 percent by 2020 and the maximum tax rate from the current 2 percent to 2.5 percent. It is set to make its final recommendation to the Ministry of Strategy and Finance tomorrow.

This is the third option of four that the committee proposed.

The fourth option is likely to be scrapped in the final recommendation because it would “give preferential treatment” to those who own one expensive home, which would “undermine the fundamental purpose” of the tax increase, according to a statement released by an anonymous member of the committee.

Under the fourth option, both the taxable portion and the tax rate will go up for multiple home owners, whereas for single-home owners, only the taxable portion will increase by 2 to 10 percentage points each year until 2020. Single-home owners already receive a 70 percent deduction on their comprehensive real estate tax.

In the meeting on Thursday, the committee also agreed to include an additional tax hike for those who own more than three homes.

Q. What will be the effect of the increase?

According to the calculation by the committee, the government’s tax revenue would increase by as little as 571.1 billion won or as much as 1.29 trillion won under the plan selected.

While the government will welcome the additional tax revenue, it represents an increased tax burden for homeowners.

Around 348,000 home owners are expected to see tax increases of as little as 12.5 percent or as much as 37.7 percent.

For an owner of a single property valued at 1 billion won, for example, a 10 percent increase in the taxable portion and a 0.5 percent rise in the tax rate would push up their comprehensive tax bill from 5.1 million won this year to 6.12 million won next year. For a 3 billion won apartment, the comprehensive tax would rise from 12.3 million won this year to 16.08 million next year.

For a person with two apartments both worth two billion won, the total real estate tax, including the comprehensive tax and property tax, will increase from 13.75 million to 26.49 million next year, nearly doubling, according to Shinhan Bank.

The committee anticipates that raising the comprehensive tax on owners of more than three homes would increase the cost of home ownership. This would eventually force owners to sell or register themselves as landlords with rental businesses (which qualifies them for deductions on property tax and lease income taxes), ultimately stabilizing the local real estate market in line with the government’s intent.

BY LEE HO-JEONG, CHOI HYUNG-JO AND JAMES CONSTANT [lee.hojeong@joongang.co,kr]