S. Korea overhauls real estate tax system, raising property tax threshold and shifting focus to residency

A real estate agency in Songpa-gu, Seoul. [Yonhap]

The Lee Jae Myung administration is undertaking a sweeping overhaul of real estate taxation in its second year in office, with "tax normalization" as its guiding principle. The centerpiece of the reform is a shift away from taxing homeowners based on the number of properties they hold and how long they have owned them, toward a system based on property value and actual length of residency — a change the government says will anchor the housing market around owner-occupiers and improve tax fairness.

Under the new framework, the comprehensive real estate tax, known as jongbusae, will exempt single-household homeowners from taxation on properties with a publicly assessed value of up to 1.4 billion won ($977,000), effectively shielding homes worth up to about 2 billion won at market price. For properties above that threshold, owner-occupiers will receive a basic deduction of 1.4 billion won, while non-residents will receive a smaller deduction of 900 million won.

The tax rate structure will also be overhauled, moving from a system based on the number of homes owned to one based on property value. A transitional step in 2027 will be followed by a unified rate schedule applied equally to single-home and multi-home owners from 2028. On the capital gains tax side, the long-term holding special deduction will be split into a "long-term residency income deduction" for housing and a "long-term holding income deduction" for non-housing assets, with the holding-period deduction for homes phased out in favor of a residency-based deduction of up to 80 percent.

President Lee Jae Myung listens to participants at a national public forum on real estate policy held at the KBS annex in Yeouido, Seoul. [Yonhap]

Jongbusae deductions and rates adjusted: homes under 2 billion won exempt, surcharges begin above 4–5 billion won

According to the 2026 tax reform package announced Monday by the Ministry of Finance and Economy, the jongbusae assessment threshold for single-household homeowners will rise from the current publicly assessed value of 1.2 billion won to 1.4 billion won, regardless of whether the owner lives in the property. The 200 million won increase reflects rising home prices and the government's aim to ease the burden on owner-occupiers.

As a result, homes with a market value of roughly 2 billion won or less will be exempt from jongbusae regardless of occupancy status.

For single-household homes with a publicly assessed value above 1.4 billion won — and thus subject to jongbusae — the basic deduction will vary depending on whether the owner lives there. Owner-occupiers will receive a basic deduction of 1.4 billion won, while non-residents will receive 900 million won.

The deduction rules for jointly owned single homes will also change. Couples who live in the property may choose between each receiving a 900 million won deduction or applying the single-household special provision for a combined 1.4 billion won deduction, whichever is more favorable. Non-resident joint owners may choose between each receiving a 400 million won deduction — totaling 800 million won — or applying the household-level special provision for a 900 million won deduction.

Multi-home owners will be subject to jongbusae when the combined publicly assessed value of their properties exceeds 900 million won, equivalent to a market value of about 1.3 billion won. Of the 900 million won basic deduction, 400 million won will be applied as a flat deduction, while the remaining 500 million won will be granted proportionally based on the share of the owner's total property value accounted for by the home they actually live in.

For example, a person who owns two homes each with a publicly assessed value of 1 billion won and lives in only one of them would receive the full 400 million won flat deduction, plus an additional 250 million won — representing 50 percent of the remaining 500 million won, reflecting the resident home's share of total property value — for a total deduction of 650 million won.

Number of jongbusae taxpayers by tax base bracket in 2025 (based on tax notices). [Provided by the Ministry of Finance and Economy]

Jongbusae rate structure to be unified from number of homes owned to property value basis. [Provided by the Ministry of Finance and Economy]

The government will overhaul the jongbusae rate structure, moving away from a system based on the number of homes owned toward one based on property value. Currently, owners of one or two homes and those with three or more homes are subject to different rate schedules. Under the reform, a transitional adjustment to the rates for one- and two-home owners will take effect in 2027, followed by a single unified value-based rate schedule for all homeowners regardless of how many properties they hold, starting in 2028.

The rate for the tax base bracket of 600 million to 1.2 billion won will rise from the current 1.0 percent to 1.3 percent next year. The government said the adjustment is intended to smooth the sharp jump in rates as the tax base moves into higher brackets. For an owner-occupied single home, this bracket corresponds to a publicly assessed value of roughly 2.26 billion to 3.11 billion won, or a market value of roughly 3.22 billion to 4.45 billion won.

The rate for the 1.2 billion to 2.5 billion won bracket will also increase, from the current 1.3 percent to 1.5 percent next year and 2.0 percent in 2028. This bracket corresponds to a publicly assessed value of roughly 3.11 billion to 4.97 billion won and a market value of roughly 4.45 billion to 7.1 billion won. Homes with a market value of around 4.5 billion to 4.6 billion won will enter the higher-rate bracket, where the tax burden will begin to rise more substantially.

The rate for the 2.5 billion to 5 billion won bracket will climb from the current 1.5 percent to 2.0 percent next year and 3.0 percent in 2028, while the 5 billion to 9.4 billion won bracket will rise from 2.0 percent to 2.7 percent and then 4.0 percent. The bracket above 9.4 billion won will increase from 2.7 percent to 3.5 percent next year and 5.0 percent in 2028. The brackets of 300 million won or less, taxed at 0.5 percent, and 300 million to 600 million won, taxed at 0.7 percent, will remain unchanged.

The government estimates that the higher assessment threshold will reduce the number of apartment units subject to jongbusae from the current top 3.1 percent — about 487,000 units — to the top 2.3 percent, or about 363,000 units.

The reform is designed so that homes in the 2 billion to 3 billion won market-value range will see their jongbusae burden fall, while those in the 3 billion to 4 billion won range will experience minimal change. For the roughly 65,000 apartment units — the top 0.4 percent — with a market value above 4 billion won, taxation will be normalized and the burden will increase in stages.

The government said the intent is to ensure that even owner-occupied single homes of exceptional value carry a tax burden commensurate with their price.

The tax credit system for single-household jongbusae will also be restructured to favor actual residents. The current system allows a combined credit of up to 80 percent through an elderly homeowner credit of 20 to 40 percent and a holding-period credit of 20 to 50 percent. Going forward, the holding-period credit will be replaced by a residency-period credit, rewarding those who actually live in their homes.

A transitional arrangement in 2027 will recognize only half the holding-period credit — 10 to 25 percent — before the full residency-period credit takes effect in 2028. A new cap on the total tax credit will also be introduced: 8 million won in 2027 and 6 million won from 2028 onward.

The fair market value ratio, currently set at 60 percent, will also be raised in stages to bring the tax base closer to actual market values. Owners of three or more homes and those holding properties in designated adjustment zones — excluding single-household owner-occupiers — will see the ratio rise to 70 percent next year and 80 percent from 2028. All other taxpayers, including owner-occupiers of a single home and those with one or two homes outside the Greater Seoul area, will move to 70 percent starting next year.

The cap on year-on-year increases in property holding taxes will also be raised from the current 150 percent to 200 percent. As the higher fair market value ratio pushes up the tax base and the ceiling on tax increases rises, the holding tax burden on owners of high-value and multiple properties is expected to grow more quickly than before.

Deputy Prime Minister Koo Yun-cheol, who also serves as minister of finance and economy, said at a pre-announcement briefing on Thursday that the government would "rationally reform the real estate tax system so that a residency-centered housing market takes hold, under the principle that a home is a place to live, not an asset to trade." He added that the package "reflects reform tasks that have long been difficult to pursue in order to restore fairness and rationality to taxation."

Capital gains tax long-term deduction shifts from holding period to residency

Apartment complexes in Dongtan, Hwaseong, Gyeonggi Province. [Yonhap]

The core of the capital gains tax reform is a restructuring of the long-term holding special deduction to center on actual residency. For housing, the deduction will be renamed the "long-term residency income deduction," while for non-housing assets such as commercial properties, it will become the "long-term holding income deduction."

Under the current system, homeowners can receive a deduction of 4 percent per year for the holding period — up to 40 percent — and a separate 4 percent per year for the residency period — also up to 40 percent — for a combined maximum of 80 percent.

Going forward, the holding-period deduction will be phased out and replaced by a residency-based deduction of 8 percent per year, up to a maximum of 80 percent. To claim the full deduction, homeowners will need to have lived in the property for at least 10 years.

The transition will be phased in gradually. In 2027, the current structure — 4 percent per year each for holding and residency — will remain in place. In 2028, the holding deduction will be cut to 2 percent per year while the residency deduction rises to 6 percent per year. From 2029, the holding deduction will be eliminated entirely, leaving only the residency deduction at 8 percent per year up to a maximum of 80 percent.

Multi-home owners will also see their deduction converted from a holding-based rate of 2 percent per year — up to 30 percent — to a residency-based rate of 2 percent per year. Multi-home owners in designated adjustment zones will continue to be ineligible for the long-term residency income deduction, as under current rules.

A cap on the deduction will be introduced for the first time to curb excessive tax benefits. Currently there is no limit, but the long-term residency income deduction will be capped at 2 billion won in 2028 and 1 billion won from 2029 onward.

Support for genuine end-users will be expanded. Single-household homeowners who have lived in their property for at least 10 years and sell at a price of 3 billion won or less will see their basic deduction raised from the current 2.5 million won to 25 million won, reducing the tax burden on long-term middle-class residents and genuine owner-occupiers.

Tax benefits for homes held without being occupied will also be curtailed. When a homeowner in a designated adjustment zone acquires a new home in another adjustment zone, the deadline to dispose of the previous home to qualify as a temporary two-home household will be shortened from three years to two years. The change is intended to reduce the period during which non-resident owners can still claim the single-household tax exemption.

Tax benefits that have applied to registered rental apartments in designated adjustment zones will also be phased out. Currently, exemptions from the capital gains tax surcharge and a preferential 50 percent long-term holding deduction continue to apply even after a registered rental period of four or eight years ends and the registration lapses. Those benefits will be scaled back through a presidential decree revision taking effect Oct. 1.

Properties sold through 2027 will retain the surcharge exemption and the 50 percent preferential deduction. Those sold in 2028 will be subject to half the surcharge rate and a reduced preferential deduction of 30 percent. From 2029, both the surcharge exemption and the preferential deduction will be eliminated entirely.

The special provision for cooperative landlords — who offer below-market rents — will also be adjusted to align with its scheduled sunset at the end of this year. Properties sold within one year of the lease expiring will continue to be exempt from the two-year residency requirement for the single-household capital gains tax exemption and the long-term residency income deduction. Properties sold more than one year after the lease expires will be subject to the standard two-year residency requirement.

The government will also normalize taxation on non-business land. Individuals holding such land will lose access to the long-term holding special deduction, while corporations holding non-business land will face a 10 percentage point increase in the corporate tax surcharge rate. To bring the tax burden on land held outside of productive activity to an appropriate level, the top jongbusae rate on comprehensively aggregated land will also be raised from the current 3 percent to 4 percent.

Relief measures offered to elderly homeowners and multi-home owners facing heavier tax burden

An aerial view of Gangnam, including apartment complexes awaiting reconstruction. [Yonhap]

The government has also built in temporary relief measures for elderly homeowners and multi-home owners who will face a heavier tax burden under the new system.

To encourage older homeowners to relocate, a temporary capital gains tax reduction will be offered. Single-household homeowners aged 65 or older who have held a home in the Greater Seoul area for at least five years and lived there continuously for at least two years up to the date of sale, and who then move outside the Greater Seoul area, will receive a capital gains tax reduction of up to 50 percent — capped at 500 million won — in 2027, and up to 30 percent — capped at 300 million won — in 2028.

However, if the seller moves back to the Greater Seoul area or acquires a home there within five years of the sale, the tax reduction will be clawed back.

To give multi-home owners more opportunity to sell, the capital gains tax surcharge will also be temporarily eased through 2028. Currently, owners of two homes face a surcharge of 20 percentage points above the standard rate, while those with three or more homes face a 30 percentage point surcharge. In 2027, those surcharges will be reduced to 5 and 10 percentage points respectively, and in 2028 to 10 and 15 percentage points. The relief will apply retroactively to sales subject to the surcharge from May 10 of this year.

A government official, responding to criticism that the move amounted to a policy reversal coming immediately after the expiration of a previous surcharge moratorium, said the easing was intended to "accompany the normalization of jongbusae on multi-home owners with a corresponding reduction in the capital gains tax surcharge burden on those same owners."

The jongbusae payment deferral system for cash-strapped owner-occupiers will also be expanded. The annual income threshold for ordinary single-household homeowners will be raised from the current 70 million won to 80 million won — with the comprehensive income threshold rising from 60 million won to 70 million won. Elderly single-household homeowners aged 65 or older who have lived in their home for at least 10 years and whose annual property holding tax exceeds 10 percent of their prior-year income will also be eligible to apply for a payment deferral.

Safeguards have been put in place to prevent the shift toward residency-based rules from penalizing homeowners in unavoidable circumstances. Time spent away from a home — after at least one year of prior residency — due to schooling, work assignments, illness, overseas stays or caring for a parent will count toward the residency period. The government said it plans to amend relevant regulations to allow recognition not only of the specific circumstances listed in the law but also of "other similar circumstances."

To preserve tax fairness and guard against tax avoidance, however, the recognized non-residency period will be capped at three years. In addition, half of the construction period during which a home is uninhabitable due to reconstruction or redevelopment, as well as periods of registered tenancy and the holding period for special-provision homes such as low-priced rural properties and second homes, will also count toward the residency period.

The single-household tax exemption for jongbusae and capital gains tax will be extended to cover second homes acquired outside the Greater Seoul area, excluding metropolitan cities. Currently the exemption applies only to homes in population-decline zones with a publicly assessed value of 900 million won or less, and to homes in population-decline watch zones with a publicly assessed value of 400 million won or less. Going forward, the exemption will be extended to general non-Greater Seoul areas outside metropolitan cities.

The value threshold for population-decline zones will remain at 900 million won or less, while the threshold for population-decline watch zones will be raised from 400 million won to 600 million won. For the newly included general non-Greater Seoul areas, the exemption will apply only to homes with a publicly assessed value of 400 million won or less.

The tax reform package is scheduled to go through a public comment period and Cabinet approval in August before being submitted to the regular session of the National Assembly in early September. The final details will be determined through legislative review and may be subject to some adjustment during that process.

y2k@heraldcorp.com