We Must Reduce the Tax Burden on Buying and Selling Homes

Owning one’s own home is a dream everyone pursues and works toward as part of life. Imposing excessive taxes on that is nothing more than making ordinary people’s lives miserable. In our society, the tax costs involved in buying and selling a home are excessively high, placing a heavy burden on people’s lives. The time has come for a policy effort to reduce the tax burden on real estate.

Housing is a basic necessity of life, so people need a home throughout their lives. That is why owning a home provides the foundation for a stable life and helps make retirement more secure and comfortable. Some people may be satisfied with renting, but government-provided rentals are subsidized by taxpayers’ money, so individuals ordinarily seek to secure their own homes. Considering even the need for funds in old age, maintaining a home of one’s own is essential for everyone. It allows people to avoid burdening family and those around them and to preserve their independence without relying on society or the state.

The right policy direction is to encourage everyone to own a home and make it easy to keep one. The government should improve the tax system so that people can buy a home when they are young and hold it for life. The existing real estate tax system has an unrealistic structure that prevents people from buying homes and also keeps them from changing or disposing of them. A top priority is to rationally reform the acquisition and registration tax imposed on home purchases and the capital gains tax borne in the process of selling one home and buying another.

The tax paid when purchasing a home is the acquisition and registration tax. Its rate is so high that it makes homeownership difficult. Excessive acquisition and registration taxes do more social harm than the revenue they raise can justify. They function as a kind of barrier to entry, obstructing people from buying homes. Preventing individuals from owning property deprives them of opportunities to build wealth, impoverishes people’s lives, and socially increases the share of households without homes, pushing them toward greater dependence on the government.

The acquisition and registration tax should be no more than a fee corresponding to document and registration services. At present, however, people must pay a substantial amount in tax in proportion to the purchase price. Not only is the tax rate high, but the top marginal progressive rate is among the highest in the world. On top of the acquisition and registration tax come the local education tax and the special tax for rural development. Keeping transaction taxes low is the global standard, but Korea’s transaction taxes have only continued to rise.

Politicians have been wrong to raise the burden of acquisition and registration taxes. A policy intended to make home purchases more difficult by increasing that burden was adopted, and politicians used the law to force tax increases. Some argue that imposing high tax rates can suppress home purchases, while others say the tax is difficult to lower because it is a local tax.

But these same people once agreed that the burden of transaction taxes should be lowered in exchange for raising property holding taxes. They have fallen into the mistaken logic that taxes should only go up. Their position reflects resentment toward others for buying and owning real estate, and when such sentiment is reflected in housing policy, the only result is social harm. Policies that show no concern for how badly people’s residential lives are damaged, and simply seek to stop others from buying homes and collect more taxes, should now be discarded.

Where people live and what kind of home they live in depend on their circumstances at any given time. Some people need to move often, while others live in one house their entire lives. A person may rent out his or her own home and move from place to place on jeonse leases. No matter where or how someone lives, taxes that discriminate or effectively punish them are wrong. It is reasonable for residents to pay taxes associated with residence and for owners to pay taxes associated with ownership. Imposing a heavy tax burden on one side creates inconvenience in daily life and restricts freedom of residence. There is no reason to impose extra tax burdens and disadvantages specifically on people who change the homes they own or move their place of residence. With little practical regulatory benefit, such restrictions only limit mobility and create greater social harm.

When selling a home, one must pay capital gains tax. It is said to be a tax paid only when there is a capital gain, but it imposes significant disadvantages on people trying to change homes. It is rare for someone to buy one home and keep only that home for life. Generally, ordinary people must sell the home they own in order to buy another. But when capital gains tax is imposed, it becomes difficult to sell one home and buy another, because the amount available for the new purchase is reduced by the tax owed. Compared with people who simply continue holding their homes, those who want to change homes suffer greater harm. It makes buying and selling more difficult and thereby restricts the freedom to transact in housing.

Capital gains tax should be deferred for people who change homes. In advanced countries, if a person sells a home and purchases another within a certain period, capital gains tax is deferred. This is a policy that helps citizens continue to maintain housing and live their own lives independently. A capital gains tax deferral system that provides an incentive for homeownership is a tax policy that any liberal democracy should naturally adopt.

It is also a problem under the current system that the special deduction for long-term holding is limited to 10 years. Since many people hold or live in a home for 20 or 30 years or more, there is no reason to discriminate against them. If the goal is to encourage long-term homeownership, the cap on the deduction period should be removed.

A flawed tax system must be corrected. A phenomenon is now emerging in which people who owned perfectly good homes are getting rid of them and trying to use government rental housing instead. Spending down and eliminating one’s assets just to avoid having them taken by the government increases burdens for both individuals and society.

The proper direction for real estate tax policy is not to disadvantage people who live in homes they own, but to encourage homeownership and make it possible to maintain that ownership for life. The acquisition and registration tax should be lowered to the level of an administrative document service fee, and capital gains tax should be changed to a system under which it is deferred when another home is purchased.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: 내 집 마련과 처분에 따른 세금부담 줄여야

Author: Sung-no Choi

Date: 2023-08-18

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=25950