A tax reform full of contradictions will only deepen confusion in the housing market

The tax reform plan announced by the Lee Jae Myung government Monday is intended to encourage owners of multiple homes to put their properties on the market and, in turn, stabilize housing prices. But a closer look reveals contradictions throughout the policy. It is unrealistic to expect more transactions while raising taxes and tightening access to financing. Critics are already saying that the government is telling people to sell their homes while making it impossible for them either to sell or buy.

The immediate issue is the sale of expensive homes with tenants in place. The government plans to abolish a special deduction for long-term residents and introduce a new income deduction for long-term homeownership, capped at 1 billion won ($698,000), with a one- to two-year grace period. In effect, homeowners who want to retain the tax benefit are being told to sell during that window.

But in all of Seoul and 15 areas of Gyeonggi, among others, the land transaction permit system requires homebuyers to move into a property within four months of receiving approval for the purchase. Unless a tenant’s lease is about to expire, selling such a home is not as simple as the government suggests. Under current rules, tenants can stay for up to four years if they exercise their right to renew a lease. But landlords seeking to meet the owner-occupancy requirement will have an incentive to reject lease renewals and ask tenants to leave.

Conditions for buyers are also deteriorating. The government has imposed strict limits on mortgage lending for expensive homes. For properties valued at more than 2.5 billion won — subject to the Comprehensive Real Estate Tax — mortgage borrowing is limited to roughly 200 million won. Even if nonresident single-home owners or multiple-home owners decide to sell, few buyers will be able to afford such properties without tens of billions of won in cash.

As a result, Seoul’s affluent Gangnam district and the so-called Han River belt could increasingly become exclusive enclaves for cash-rich buyers and those with inherited wealth.

The government says the reform will raise the tax burden on ultraexpensive homes while protecting owner-occupiers with a single home. But capping the long-term residency income deduction at 1 billion won could leave even single-home owners unable to afford a comparable home in the same neighborhood or of a similar size after selling their current property. That, in turn, could encourage homeowners to hold on to their properties, further shrinking the supply of homes available for sale.

Deputy Prime Minister for Economic Affairs Koo Yun-cheol has promised measures to protect real-demand buyers, including young people and newlyweds. But rather than patching the policy with temporary fixes, the government should first address the contradictions built into the tax reform itself.

If the plan takes effect as proposed, homeowners will lock up their properties, while anxiety over the housing market will spread across all three fronts — sales, jeonse (lump-sum deposits) and monthly rents. Young people and other households without homes of their own are likely to bear the heaviest burden.