"When Do We Have to Sell?" Market Confusion Grows Over Sangsaeng Lease and Redevelopment Purchased Lease Rules

▲ Apartment complexes in Seoul viewed from Namsan Mountain

While the government has announced a tax reform plan that significantly raises taxes for owners of ultra-high-value homes, non-resident single homes, and multiple properties, market confusion is mounting due to a tangled web of complex provisions.

Homeowners facing heavier tax burdens driven by sudden regulatory changes are voicing their frustrations.

Inquiries are flooding into frontline real estate agencies, tax accounting offices, and government ministries to verify tax changes and exception clauses.

According to the industry on August 6, single-home owners who meet the government's Sangsaeng (win-win) landlord requirements are currently confused about when they must sell their homes if lease terms are still remaining.

The Sangsaeng landlord system exempts single-home owners from the two-year residency requirement for the long-term holding special deduction if they sign a lease contract raising the rent by no more than 5% compared to the previous contract.

In this tax reform plan, the government announced it would abolish the Sangsaeng landlord special provision simultaneously with its sunset at the end of this year, stating that such homes must be sold by the end of next year to be recognized for the two-year residency requirement.

However, homeowners whose current lease terms extend into 2028 are pushing back, arguing that they cannot sell their homes by next year.

In fact, a person surnamed A, who owns a home within a land transaction permit zone, signed a Sangsaeng lease contract limiting rent increases to 5% for two years from June 2024 to June 2026, and extended the lease term until June 2028 through a contract renewal at the end of June this year.

Under the amendment to the Enforcement Decree of the Income Tax Act prepared by the government, if a Sangsaeng lease contract expires by the end of this year, the existing benefits will be granted if the property is sold between October 1 of this year and the end of December 2027.

If a Sangsaeng lease contract expires after January 1, 2027, the two-year residency requirement will be recognized as fulfilled if the property is sold by the earlier of "one year from the expiration date of the lease contract" and "December 31, 2029."

However, the Ministry of Economy and Finance explains that these conditions apply only when the current lease contract is a "Sangsaeng lease."

If the Sangsaeng lease contract has already expired and the rent was raised by 5% or more during contract renewal, it is not considered a Sangsaeng lease contract, meaning the property must be sold by the end of next year to have the two-year residency requirement recognized, according to the ministry.

Controversy has erupted because, prior to this tax reform, capital gains tax exemptions and long-term holding special deductions could be received regardless of the sales timing as long as the rent was raised by within 5% at least once during the entire rental period.

Mr. A protested, saying, "Under previous regulations, after the Sangsaeng lease ended, a new lease contract is currently underway as a normal contract. Suddenly forcing the sale of the house by the end of next year could require a large sum of compensation to get the tenant to leave, and even if the tenant refuses, I cannot receive the long-term holding special deduction, increasing the capital gains tax burden. Real residency is difficult at the moment, and trusting only the government has thrown all my plans off track."

Currently, selling a house with a tenant inside a land transaction permit zone is also difficult.

Although the government deferred the obligation of actual residency until the end of the previous lease term when a home with a tenant inside a permit zone was purchased by a homeless buyer, this exception rule also ends at the end of this year.

Consequently, market observers speculate that unless the government lifts the permit zones, it will have no choice but to extend permission for transactions involving tenants until at least next year.

Purchased rental business operators, who are losing tax exemption benefits on heavy capital gains taxes, are protesting that the hard-built tower of "half-price rentals" has collapsed.

In this tax reorganization, the government decided to grant purchased rental business operators exemption from heavy capital gains taxes and a long-term holding special deduction (50%) only if houses whose mandatory rental periods have ended are sold by the end of next year.

Rental business operator B said, "With increased tax burdens and loan regulations, there are no buyers for homes, so selling all homes within a year is unreasonable. When someone owns multiple homes, selling them all at once within a year aggregates the capital gains and increases the tax burden, making the grace period far too short and leaving us bewildered."

Debates are also flaring up among landlords whose properties, with rental registrations automatically revoked, have entered redevelopment projects and are caught in restrictions on the transfer of cooperative member status.

Apartments in overheated speculation districts that have received establishment authorization for cooperatives (redevelopment) prohibit the transfer of cooperative member status, preventing owners from selling.

This is because, under the principle that rental business operators cannot reside in rental housing, those who failed to meet the exception requirements of 10 years of ownership and 5 years of residency will see buyers of such properties subjected to cash settlements.

Accordingly, through this amendment to the Enforcement Decree of the Income Tax Act, the government plans to extend the sales deadline for redevelopment promotion complexes to within one year from the latest starting point among the expiration date of the mandatory rental period, the public notice date of adjustment target area designation, and the previous notice date.

For example, for complexes currently unable to be sold due to restrictions on transferring cooperative member status, benefits such as exemption from heavy capital gains taxes will be granted up to one year from the previous notice date after construction progresses.

However, rental business operators are complaining that while comprehensive real estate holding tax burdens have surged sharply due to this tax reform, the path to selling has been blocked.

In particular, most registered rental homes are in a non-resident state, and projections indicate that comprehensive real estate holding tax burdens will surge two to threefold compared to before, driven by fallout such as reductions in basic deductions and tax rate hikes.

Sung Chang-yeop, president of the Korea Housing Landlords Association, pointed out, "Even if the allowable sales timing for redevelopment complexes has been delayed, the problem is that comprehensive real estate holding tax burdens are increasing exponentially because houses cannot be sold due to restrictions on transferring cooperative member status, land transaction permit zones, and lease contract renewal request rights. Landlords should be given opportunities to sell, allowing the transfer of cooperative member status if they wish."

As the tax burden on non-resident single-home owners grows going forward, considerable confusion is also expected in the process of proving exceptions.

This is because non-resident single-home owners must self-prove that they relocated due to "unavoidable reasons" in order to be recognized as having resided for capital gains tax and comprehensive real estate holding tax purposes.

The government's stance is that beyond enumerated reasons such as schooling, employment, illness, and overseas residency, tax authorities will individually examine facts and circumstances to recognize residency for cases where "reasons deemed similar to these" are also acknowledged to have inevitability.

A real estate expert noted, "Special cases where people cannot reside in their owned homes can be far more diverse and complex than what the government has enumerated. If tax authorities issue differing interpretations regarding where unavoidable reasons end, market confusion will be further exacerbated."

(Photo: Yonhap News)

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