What does it mean to normalize property holding taxes?
A new report states that Korea's property tax debate should focus not only on expensive homes but also on whether ordinary homeowners are paying too little in holding taxes.
Apartment complexes are seen from Seoul Sky at Lotte World Tower on Aug. 4. The government plans to overhaul real estate taxation by shifting the primary criteria from the number of homes owned to their value and from the length of ownership to the period of actual residence. The tax burden will be reduced or maintained for owner-occupied, low- and mid-priced single homes while increasing for nonowner-occupied properties, expensive homes and multiple-home owners.NEWS1
Kim Won-bae
The author is an editorial writer at the JoongAng Ilbo.
When Paris raised its property tax rate from 13.5 percent to 20.5 percent in 2023, taxpayers reacted angrily. France levies property taxes on separately assessed rental values, but the same rate applies to inexpensive and expensive homes. Paris said that it needed revenue to maintain public services and invest in urban infrastructure. Local governments in New York likewise determine the property tax revenue needed, then calculate rates based on the total assessed value of real estate. Under the benefit principle, property owners share local government costs in proportion to property values.
Korea is different. A progressive structure was introduced to property taxes in 1973, and the comprehensive real estate holding tax was created in 2005. The lowest nominal home property tax rate is 0.05 percent, and the top comprehensive holding tax rate is 5 percent. Because they use different bases, actual burdens do not differ 100-fold, but the gap remains substantial.
According to a National Assembly Futures Institute report released last month, the effective holding tax rate ranges from 0.038 percent in the lowest asset bracket to 0.472 percent for assets exceeding 5 billion won ($3.5 million), a roughly twelvefold difference. Korea’s holding tax burden is often said to be lower than in other advanced economies, but that also reflects low effective rates on most ordinary homes.
When the government announced tax revisions on Aug. 3, it called for “tax normalization,” as tax burdens had failed to keep pace with rising home prices. It increased comprehensive real estate holding and capital gains taxes on expensive homes, noting that homes worth at least 4 billion won account for only 0.4 percent of the total.
But what exactly is the standard for normalization? The Organisation for Economic Cooperation and Development, or OECD, has repeatedly recommended that Korea reduce its reliance on transaction taxes and increase the share of holding taxes. But the latest revisions depart from that recommendation.
The report noted that the effective property tax rate on apartments worth 1 billion won or less is only 0.098 percent, far below even the minimum level required for benefit-based taxation as a source of local government revenue, and that abolishing the temporary preferential rate for single-home owners should eventually restore the basic function of holding taxes.
Ending that break would increase holding tax revenue by about 3.3 trillion won. By contrast, eliminating all single-home tax credits under the comprehensive real estate holding tax, which targets expensive properties, would raise only about 180 billion won. Those figures show that much of Korea’s low holding tax burden stems from low property taxes on ordinary homes. If the government truly wants normalization, it must consider ordinary homeowners’ property taxes and comprehensive taxes on expensive homes.
Under Korea’s system, tax burdens can rise rapidly with home prices even without changes in tax rates. The institute estimates that housing price increases from 2024 through this year alone will raise holding taxes by 28.5 percent and expand the number of households subject to the comprehensive real estate holding tax from about 418,000 to 600,000.
The comprehensive real estate holding tax does have positives. It makes wealthier people pay more and serves a redistributive purpose. But should the relative burden on expensive homes rise again when the system is already strongly progressive?
France imposes a real estate wealth tax, or IFI, separately from ordinary property taxes. IFI applies when net real estate assets exceed 1.3 million euros ($1.5 million), and a top rate of 1.5 percent applies to the portion above 10 million euros. In Korea, owners of three or more homes face a top 5 percent rate on the tax base exceeding 9.4 billion won. The tax bases differ, precluding simple comparison, but Korea’s progressivity is clearly substantial. France also deducts relevant debt, but Korea’s comprehensive tax does not.
Given this structure, the comprehensive real estate holding tax functions not merely as a holding tax but also as a tool for managing the property market. Policymakers must therefore consider what happens when the market turns downward.
The government can influence markets through taxes and lending regulations, but it cannot stop prices precisely where it wants. If interest rates rise or the economy weakens, measures strengthened during an upswing can become excessive during a downturn. Expensive and lower-priced homes are interconnected, as are sales and rental markets.
Even if higher taxes target the wealthy, the resulting market shock does not affect them alone. Households carrying heavy debt or unstable incomes may suffer more from the same decline in home prices. This is not merely an issue for the rich.
Consequently, the government’s claim of “tax normalization” deserves closer scrutiny. Is what it calls normalization really normalizing the overall tax system?
This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
