Do Real Estate Gains Face Lower Taxes Than Labor Income?

The real estate market is difficult to navigate.

President Lee Jae-myung stated during a Cabinet meeting on August 4 that while labor income exceeding 1 billion won is taxed at a maximum rate of 49.5%, including local income tax, capital gains from real estate, even at 10 billion won, result in only a few million won in actual taxes. He noted that while it may be reasonable to reduce taxes on a primary residence that has appreciated in value, it is inequitable for investors who earn tens of billions from real estate to pay minimal taxes.

The public perception is straightforward: earning 10 billion won through labor results in nearly half being paid in taxes, while earning the same amount through real estate incurs only a few million in taxes. This creates an impression that the tax system favors income from real estate over labor.

In conclusion, this may apply to specific high-value long-term primary residences. However, it does not mean that anyone earning 10 billion won from investment properties pays only a few million in taxes. The President's comparison placed different properties and tax rates side by side.

How have the numbers changed?

A similar calculation to the President's figures was presented in March by the Citizens' Coalition for Economic Justice. They analyzed that if a person buys an apartment in Apgujeong for 250 million won and sells it for 1.27 billion won, the capital gain would be 1.02 billion won, but the estimated capital gains tax, excluding additional costs, would be about 760 million won, with local income tax assessed separately. In a separate case, they calculated that if a person earned 4.25 billion won in labor income over 15 years, the income tax would be about 1.2 billion won, while the capital gains tax on the same amount of apartment gains would be 240 million won.

The Citizens' Coalition's example of 1.02 billion won assumes that a one-household, one-home owner has held and lived in the property for over 10 years, qualifying for a maximum 80% long-term holding exemption. The labor income comparison also assumed an annual income of 280 million won over 15 years. However, the headline prominently featured the high-value case of "1.02 billion won in gains with a capital gains tax of 760 million won."

At the time, Jo Jeong-hun, the head of the Land and Housing Committee of the Citizens' Coalition, raised concerns during a national discussion on real estate policy hosted by the President, stating that the benefits for primary homeowners encourage concentration in the apartment market and suggested the need for reduction. He used strong language to describe the purchase of real estate, including primary residences, as "almost all speculation." While his comments targeted tax benefits for single-homeowners, they blurred the line between primary residences and investment properties.

A more direct connection comes from Nam Gi-up, head of the Land + Freedom Research Institute. During the same discussion, he claimed that if a person realizes a capital gain of 1 billion won from a home held for 10 years, the average capital gains tax would be about 10 million won, while the tax on 1 billion won in labor income over 10 years would be 250 million won. The President immediately responded that he had previously followed Nam's claims during his time as a private citizen and as mayor of Seongnam. At the very least, the President confirmed that he referenced Nam's taxation claims in the past. However, this does not imply that he took the specific figure of "10 billion won" from Nam.

Nam explained that the capital gains tax of 10 million won corresponds to an effective tax rate of 1%. However, it is difficult to verify the specific acquisition price and transfer conditions that led to this figure based solely on public statements. The calculation of 250 million won in tax on 1 billion won in labor income also lacks details on the annual distribution of income and deduction conditions. If these figures are from an expert influencing policy, the effective tax rate and the underlying tax calculation should be explained as well.

The Citizens' Coalition's figure of 760 million won reflects the application of the one-household, one-home exemption and the maximum 80% long-term holding exemption. For high-value single homes, only the portion of the gain exceeding 1.2 billion won is taxable, while the portion below that is exempt. The comparison units are also not the same. The 49.5% labor income tax is the maximum marginal tax rate, including local income tax, while the 760 million won figure reflects the estimated tax amount after accounting for exemptions and deductions.

However, it is also difficult to argue that this difference inflates the tax burden on labor income. The actual burden rate on labor income in the 10 billion won range also approaches the maximum tax rate. The key issue is not the form of the tax rate. The tax amount accumulated over 10 years for a long-term primary residence is presented as if it were the same as the tax on general investment properties.

Is there a capital gains tax on stocks?

If equity and asset income equity is the issue, real estate cannot be viewed in isolation. Shareholders of publicly traded companies who are not major shareholders under tax law do not pay capital gains tax on their gains. Under the current system, if an investor diversifies across multiple publicly traded stocks and does not meet the major shareholder criteria for each stock, it is possible to have a total capital gain of 10 billion won without incurring capital gains tax.

Of course, there are taxes involved. A securities transaction tax applies to the sale price. This does not mean that the President should not mention real estate. However, to advocate for equity between labor and asset income, one cannot conclude solely based on real estate.

Equity raises questions about the boundaries of exemptions.

The exemptions and deductions granted to long-term primary residences serve the purpose of housing stability and facilitating smooth residential transitions. Similarly, excluding capital gains from publicly traded stocks for shareholders who are not major shareholders is justified by the policy goal of revitalizing the capital market. It cannot be immediately concluded that treating them differently from labor income is an unfair advantage.

The issue lies not in the existence of exemptions and non-taxation but in their boundaries. Should the maximum 80% deduction apply without a cap to gains exceeding 1 billion won for the sake of protecting primary residences? Should the same principle apply to exclude high-value stock gains from taxation for the sake of revitalizing the capital market? These questions must be examined under the same principles. The President should be asking not why only a few million are collected from a 10 billion won real estate gain, but whether tax benefits with justifications for housing protection and capital market revitalization should apply equally to high-value asset gains.

Does a 10 billion won capital gain from real estate always incur less tax than 10 billion won in labor income? No. This outcome is only possible when the special case of a high-value long-term primary residence applies; it does not reflect the tax situation for general investment properties.

The President's concern about re-evaluating the boundaries of tax benefits for high-value asset gains is valid. However, his explanation presented the tax amount from a long-term primary residence as if it were applicable to investment properties. This approach does not lead to finding an answer to equity.

Tax equity is not about matching the most dramatic numbers. It involves verifying whose income it is, under what conditions it was generated, and how far exemptions and non-taxation should be allowed for each asset under the same principles.

* This article has been translated by AI.