A tax incentive that allows real estate sellers to deduct a portion of their capital gains tax by depositing proceeds into a pension account will be abolished at the end of next year. The government is undertaking a sweeping overhaul of tax expenditures, scrapping special tax provisions with low uptake and converting programs where direct fiscal support is more effective than tax relief.

According to the Ministry of Economy and Finance's detailed 2026 tax reform plan released Wednesday, the special capital gains tax exemption for real estate sale proceeds deposited into pension accounts will expire on Dec. 31, 2027.

Residential complexes in central Seoul as seen from Seoul Sky at Lotte World Tower in Songpa-gu. [Yonhap]
Residential complexes in central Seoul as seen from Seoul Sky at Lotte World Tower in Songpa-gu. [Yonhap]

Under the provision, basic pension recipients who sell real estate and deposit the proceeds into a pension account can deduct 10 percent of the deposited amount from their capital gains tax liability, up to a ceiling of 100 million won ($70,700). Eligible recipients must have owned the property for at least 10 years and must have been a single-home or no-home household at the time of the sale.

The government introduced the measure through its 2024 tax code revision to encourage older Koreans to convert real estate holdings into cash. The rationale was that, given how heavily real estate weighs in the assets of older households, helping them shift that wealth into pension savings would provide more stable cash flow in retirement.

The government concluded that actual use of the provision fell short of expectations, making it difficult to justify keeping it in place. Because the exemption targets basic pension recipients, transactions involving homes with actual transaction prices exceeding 1.2 billion won — the threshold at which capital gains tax is levied — were relatively rare.

Tax credits for corporate sports teams and esports teams will also be converted to direct fiscal support. Currently, general sports teams and esports teams receive a 10 percent tax credit on operating costs for three years, while teams for athletes with disabilities receive a 20 percent credit for five years.

The government determined that direct fiscal support would be more effective, noting that companies operating at a loss cannot benefit from tax credits. Teams established by the end of this year will continue to receive benefits under the existing rules. A separate provision granting a 10 percent deduction on operating costs for esports tournaments held outside the Greater Seoul metropolitan area will also end this year and be replaced by a fiscal program.

The VAT exemption on heating services for permanent public rental housing will end this year and be folded into heating cost support programs such as energy vouchers. The VAT exemption on electric and hydrogen-powered city, rural and village buses — originally set to expire at the end of 2028 — will be brought forward to the end of this year and replaced with direct fiscal support. Certain indirect tax reductions on transportation and logistics in island regions will likewise be converted to direct support after their sunset dates.

Concerns have emerged that tax benefits could shrink sharply as the government moves to overhaul roughly half of all tax expenditures this year. The government's position is that low-income earners who pay little tax see limited benefit from tax deductions and credits, making direct fiscal transfers more effective. Tax credits for childbirth, adoption and marriage are among the measures cited as examples.

The VAT credit applied to business operators' credit card sales will also be revised. The preferential deduction rate will be lowered from 1.3 percent to 1.2 percent and held at that level for three years, while the preferential deduction cap — previously raised to 10 million won — will be removed and reset to the standard ceiling of 5 million won.

In response to concerns that the changes could increase the tax burden on self-employed business owners, the government said the revision to the VAT credit on credit card and other sales "is intended to normalize a temporary special provision" and that "the need to protect self-employed workers was also taken into account."

The government said it is gradually scaling back the preferential deduction rate and cap that were temporarily expanded during the global financial crisis and the COVID-19 pandemic, and stressed that the move is not a tax increase on the self-employed. It also noted that, since card and other electronic payment methods are now widely used, the need to incentivize sales reporting through tax credits is lower than it once was.

"More than 93 percent of businesses eligible for the tax credit receive deductions within the standard 5 million won cap, so the adjustment to the preferential cap will have no impact on them," the government said.


y2k@heraldcorp.com