Korea to Trim Tax Breaks on Rental Apartments, Making Sale Timing Key

When South Korea revised its private rental housing law on August 18, 2020, it ended new registration of apartments as either short-term or long-term general private rental housing. Apartments already registered are automatically deregistered once their mandatory rental period ends — and, as it happens, a large number of those periods are now expiring all at once. On top of that, a recently announced tax revision bill includes measures to scale back the tax benefits for registered rental housing, and inquiries from rental operators have risen sharply.

Registered rental operators of apartments receive three main tax benefits.

First is a special 50% deduction under the long-term holding special deduction for apartments held as eight-year long-term rentals. To apply the 50% deduction rate to the capital gains that accrue during the rental period, operators must observe the mandatory rental period, cap rent increases at 5%, and meet requirements on size, assessed value, local-government registration as a rental operator, and business registration with the tax office.

Second is exemption from the heavy capital gains tax rate. Operators who have met the mandatory rental period, the assessed-value requirement, the 5% cap on rent increases, and the registration requirements are exempt from the heavy tax rate for multiple-home owners without any time limit, even if their registration is automatically canceled.

Third is a special tax exemption on the home they live in. If an operator holds a qualifying rental home along with one home they have lived in for at least two years, the rental home is excluded from their home count when they sell that residence, and the one-home-per-household exemption applies.

The latest bill sets deadlines on the first two of these benefits. Under the long-term holding special deduction, purchased rental apartments in designated overheated zones that have been automatically deregistered after their mandatory rental period ends will see the preferential deduction rate fall from 50% to 30% for sales from 2028, with no preferential benefit at all for sales after that. The same applies to the exemption from the heavy tax rate. For apartments under the same conditions, the heavy rate is waived only for sales made on or before December 31, 2027. In short, owners must complete their sales by the end of 2027 to receive the previous benefits in full.

So how much does the tax change as each special provision disappears?

One client, referred to as A, registered an apartment bought eight years ago for 430 million won ($311,000) as long-term rental housing, and its current market value stands at around 900 million won ($651,000). A also owns two other homes. If A qualifies for both the exemption from the heavy rate and the long-term holding special deduction, the estimated capital gains tax is about 75 million won ($54,000). Without the long-term holding special deduction, it rises to 135 million won ($98,000). If the heavy multiple-home tax rate is then applied on top, it swells to around 250 million won ($181,000). In effect, the tax burden nearly doubles each time one of the provisions disappears.

The problem is predictability. In a market where transactions are not easy, those who fail to sell within the set deadline face a tax that grows in stages, and the burden of penalties also makes it hard to choose voluntary deregistration midway. The approach of expanding the ranks of private rental operators in the name of housing supply, only to claw back the benefits now, needs to be reconsidered.

Because the tax owed can differ by hundreds of millions of won based on the timing of a sale alone, those facing automatic deregistration would do well to start weighing when to sell.