Will Rental Housing Providers Lose Capital Gains Tax Exemption on Primary Homes Sold Within Five Years? Backlash Grows

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Controversy is growing as the government moves to end capital gains tax exemptions on primary residences for registered rental housing providers, alongside a previously announced plan to scrap heavy taxation exemptions on registered rental homes by the end of next year.

Rental housing providers are pushing back, arguing that stripping away tax exemptions on primary homes on top of existing rental housing tax benefits effectively strips away all incentives for providers who have fulfilled their legal obligations.

According to the government and industry sources on Wednesday (August 12), the Ministry of Finance and Economy included measures in its tax reform package to scale back capital gains tax exemption exemptions for registered rental homes, limiting eligibility to properties sold by the end of next year to qualify for heavy tax exemptions and long-term holding special deductions (50 percent).

For properties whose mandatory rental periods do not expire by January 1 of next year, owners must sell them within one year from the end of the mandatory rental period, or within one year from the date of the previous public notice for redevelopment project complexes, to qualify for the exemption from heavy capital gains taxation.

The government legislative-pre-announced these measures by revising Article 167, Paragraph 3 of the Enforcement Decree of the Income Tax Act on the 7th of last month.

The issue is that this provision is also linked to the primary residence tax exemption requirements granted to registered rental housing providers.

Under Article 155, Paragraph 20 of the Enforcement Decree of the Income Tax Act, which governs special exceptions for households with a single home, rental providers holding registered rental housing designated under the heavy tax exemption provisions of Article 167, Paragraph 3 are treated as single-home owners when selling their primary residences, granting them special tax exemptions and long-term holding special deductions (50 percent for eight years).

This benefit is available only if all household members have resided in the home for two or more years, met certain conditions such as limiting rent increases to within 5 percent during the mandatory rental period of the registered rental housing, and sold the property within five years from the date of the initial rental housing registration cancellation.

However, because the revision to Article 167, Paragraph 3 limits the tax exemption period for registered rental homes to the end of next year or one year after the mandatory rental period ends, tax experts analyze that unless a separate subsidiary clause is established, the expiration of the rental home tax exemption will also result in the loss of the primary residence tax exemption.

In response, an official from the Ministry of Finance and Economy stated, "If registered rental properties remain even after the period for exemption from heavy capital gains taxation on registered rentals expires, they will be recognized as multiple-home properties, meaning the primary residence tax exemption will also disappear, which is correct."

In other words, the government will not recognize the five-year primary residence tax exemption for rental providers, a detail that was not included in the tax reform package originally announced by the Ministry of Finance and Economy.

Rental providers argue that it is unfair for the government to eliminate primary residence tax exemptions following the reduction of tax benefits for registered rental homes.

Mr. A, who registered three small apartments located in Nowon-gu and Guri, Seoul, as rental properties in 2018, said, "Does this mean that if I fail to sell all three rental properties by the end of next year, I must also sell and move out of the home I currently live in by next year just to receive the tax exemption?" He added, "It was suddenly designated as a land transaction permit zone last year and this year, making sales difficult, and with stringent loan regulations, it is questionable how many rental properties can even be sold within a year. To wipe out primary residence tax exemptions and long-term holding deductions as well leaves us in despair."

Sung Chang-yeop, president of the Korea Housing Landlord Association, claimed, "Under the current law, rental providers are prohibited from living in their registered rental properties, and because they provide long-term rentals of eight years or more, they were given a five-year grace period to sell their primary residences as single homes. Now that the registration cancellation points are arriving, they are breaking their promise and stripping away all tax benefits after previously encouraging rental registrations."

Voices expressing concern over the side effects of retroactive legislation are also coming from the tax accounting sector.

Tax accountant Kim Jong-pil said, "In the current housing market, if someone holds multiple rental properties, selling them within the heavy taxation exemption deadline may be difficult, or they might not sell even if listed. If we are not careful, an unreasonable problem could arise where people cannot even receive the primary residence tax exemption permitted by law."

Another pointed issue is that because the grace period to sell rental housing is only one year, if rental providers sell all their properties at once, capital gains taxes become progressive under the principle of 'same-year income aggregation taxation,' increasing their tax burden.

Consequently, opposition opinions from rental providers are flooding the legislation pre-announcement bulletin board of the Ministry of Finance and Economy.

There is widespread dissatisfaction with retroactively applying regulations that did not exist at the time of registration to providers who fulfilled their rental duties, with many calling for an extension of the grace period, recognition of exceptions, and the maintenance of the five-year primary residence tax exemption.

Multiple rental providers argued, "Even if the eight-year mandatory rental period ends in 2028, if tenants exercise their right to request contract renewal, we cannot sell our homes until 2030 unless we forcibly evict the tenants. Please extend the selling deadlines for registered rental apartments and protect primary residence tax exemptions and long-term holding deductions by attaching subsidiary clauses."

One landlord stated, "While the government reverses heavy capital gains tax enforcement to lower tax rates for multiple homeowners whom it treats as speculators, it is urging rental providers who fulfilled their duty of half-price rent for eight years to sell all homes within a year while eliminating tax benefits. This is a matter of equity, and trusting the government has come back to us as punitive taxation."

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