Cap on Long-Term Holding Special Deductions to Block Tens of Billions of Won in Tax Breaks; Shift Focus from Ownership to Residency

▲ An apartment complex view in Seoul.

The South Korean government will progressively tighten residency requirements for the long-term holding special tax deduction on housing starting in 2028, and completely overhaul the system by 2029 to grant tax benefits exclusively for actual residency.

By sequentially introducing caps of 2.0 billion won and 1.0 billion won, the government aims to fundamentally block cases where sellers of single ultra-high-valued homes receive massive capital gains tax reductions worth tens to over 10 billion won through the special deduction.

The Ministry of Economy and Finance announced the 2026 tax reform package containing these measures.

The government is pushing for a sweeping overhaul of the capital gains tax with the aim of normalizing the tax burden on non-resident and ultra-high-valued homes.

The current long-term holding special deduction will be bifurcated into housing and non-housing properties (such as commercial buildings), and starting in 2028, the deduction for housing will be renamed the "long-term residency income deduction," while the deduction for non-housing properties will become the "long-term holding income deduction."

For housing, in order to provide greater support for actual residents, the current deduction based on the period of ownership will be phased out after a one-year grace period and gradually converted into a residency-based deduction.

Currently, owners of a single home with an actual transaction price exceeding 1.2 billion won can receive a 4% deduction per year for ownership and a 4% deduction per year for residency, up to 40% each for a maximum of 10 years, totaling a maximum deduction of 80%.

Next year, the current system will be maintained, but in 2028, the ownership component will be reduced to 2% per year while the residency component is increased to 6% per year.

Starting in 2029, an 8% benefit per year will be granted exclusively for residency.

The maximum deduction rate of 80% will be maintained.

For multiple homeowners in non-adjusted zones, they currently receive a 2% deduction per year based on ownership, up to a maximum of 30% for 15 years.

Multiple homeowners will also maintain the current system next year, but in 2028 the rates will change to 1% per year for ownership or 2% per year for residency.

This translates to a maximum of 15% for ownership and 30% for residency.

Finally, starting in 2029, it will be unified at 2% per year for residency, applying a maximum of 30%.

Multiple homeowners in adjusted zones will be excluded from residency deductions altogether.

For non-housing buildings such as commercial properties, the current ownership-based deduction will be maintained.

Deputy Prime Minister and Minister of Economy and Finance Koo Yun-cheol said, "We will exclude the long-term holding special deduction for periods without actual residency," adding, "We will protect single-home owners who reside in their properties as much as possible by applying the maximum 80% deduction for 10 years, just as we do now."

To fundamentally block deductions amounting to tens of billions of won, a cap on the long-term residency income deduction will be newly established.

The cap will be set at 2.0 billion won in 2028 and reduced to 1.0 billion won starting in 2029.

Currently, deductions are given according to the deduction rate without any monetary limit.

The caps will be applied per individual annually and per transferred property item.

For a single home co-owned by two or more people, the cap per transferred property will be prorated and applied according to the ownership share. If a single home is sold in installments across different years, the cap will be distributed and applied according to the installment sales ratio.

If a married couple sold an apartment co-owned in a 5:5 ratio, they would each be able to receive an income deduction up to a cap of 1.0 billion won in 2028, and up to 500 million won each starting in 2029.

Cho Man-hee, the Tax Office Chief at the Ministry of Economy and Finance, explained, "Because the special deduction previously allowed up to 80% without any limit, individuals who made capital gains of 5.0 billion won or even 10.0 billion won were still receiving benefits, prompting various criticisms regarding tax equity that the benefits were overly excessive."

According to the government, out of approximately 5.1 trillion won in total special deductions for high-priced homes with a reported transfer value exceeding 1.2 billion won in 2024, Seoul accounted for 4.6 trillion won, or about 90%.

An analysis by the National Tax Service showed that out of the top 100 properties by special deduction amount, 99 were concentrated in Seoul.

Among them, 87 were located in Gangnam-gu (68 properties) and Seocho-gu (19 properties).

The average deduction amount reached 4.1 billion won in Gangnam-gu and 3.3 billion won in Seocho-gu.

National Tax Service Commissioner Im Kwang-hyun previously stated, "There was even a case where someone sold a single home in Gangnam-gu and received more than 20.0 billion won in deductions through the special deduction," calling it "truly the pinnacle of regressivity."

While capital gains vary vastly depending on purchase and sale prices, the government appears to have designed the system by taking into account housing price growth rates over the past 10 to 15 years and appropriate transfer values.

According to government explanations, assuming an 80% deduction rate, if housing prices tripled and a property was transferred for 5.0 billion won, or if prices doubled and the transfer value reached around 6.2 billion won, these serve as the baseline threshold for the 2.0 billion won long-term holding income deduction cap.

If a 1.0 billion won cap and an 80% deduction rate are applied, the baseline threshold for transfer value becomes 3.0 billion won if housing prices tripled, and 3.7 billion won if they doubled.

If someone purchased an apartment for 1.0 billion won and sold it for 3.0 billion won, factoring in the 1.2 billion won exemption and an 80% deduction rate, this acts as the baseline threshold for the 1.0 billion won cap starting in 2029.

Chief Cho Man-hee explained, "Those with transfer values of around 3.0 billion won whose properties tripled in value will not hit the 1.0 billion won cap, whereas individuals with high transfer values of 4.0 billion won or 5.0 billion won will be subject to the cap."

If a single-home owner who resided in and owned a property for 10 years acquired it for 2.5 billion won and sold it for 7.5 billion won, they can currently receive 3.36 billion won in special deductions by applying an 80% deduction rate, but this will be drastically reduced to the capped amount of 2.0 billion won in 2028, and further down to 1.0 billion won starting in 2029.

In addition, following the transition to residency-based deductions, single-home owners with short residency periods will see reduced deduction benefits.

Assuming a single-home owner acquired a house for 1.2 billion won, sold it for 3.2 billion won, and resided in it for 2 years while owning it for 10 years, under the current tax system they receive a total deduction rate of 48% (8% for residency, 40% for ownership), enjoying a deduction benefit of 600 million won.

In 2028, the deduction amount will shrink to 400 million won with a total of 32% (12% for residency, 20% for ownership), and starting in 2029, only the 16% residency portion will apply, reducing the deduction amount to 200 million won.

(Photo: Yonhap News)

※