Taxation on HouseRental Income

Date: November 15,2019

I. Introduction

As housing prices are increasing rapidly inseveral metropolitan areas, the government has been tighten taxes includingwithholding taxes and capital gain taxes. It also has introduced tougher rentalhousing system this year. Therefore, this paper is to look into taxationsystems of housing in Korea.  

II. Overview

1. Taxationon registered rental business entities

To be recognized as a rental business entity,any person who intends to rent housing should apply for registration as arental business entity at the district office and also register a businessoperator at the tax office. ‘Long-term housing rental business entities' referto those who operate real-estate leasing business for more than 8 years and‘short-term rental business entities' are for more than 4 years.

Where a rental business entity starts itsrental business with a house cheaper than KRW 600 million (fair market price)and retains the increase rate of rental fees including security deposit below5% the entity would be given tax benefits. In addition to that, retaining therental housing for more than 5 years is required to have it excluded from thecounting of houses in retention in deciding capital gain taxes. In this casesshort-term rental house business entities should retain its rental housing formore than 5 years in order to enjoy tax breaks for non-taxable capital gains.

2. Taxationon unregistered, general, rental business entities

Taxation on lease income for unregistered rentalbusiness entities decides based on the number of houses a rental businessentities have.

1)  Incometax is not levied on single home owners with the exception of those who retaina house which exceeds KRW 900 million.

2)  Incometax is levied on households with 2 houses but deemed rent for security depositsis not the subject to income tax.

3)  Incometax is levied on households with 3 houses and it goes for monthly rent anddeemed rent for security deposit as well.

* Options between separatetaxation & global taxation for rental business entities with incomeexceeding KRW 20 million

Until 2018 housingrent not exceeding KRW 20 million was subject to non-taxation but it wasreformed to be taxable giving options to taxpayers between separate taxationand global taxation. For housing rent over KRW 20 million has been subject toglobal taxation and not changed.

Where a rental business entity who registeredlong-term rental business entity holds another general rental housing taxeswill be levied based on ①, ②, and ③ above.For example, where a rental business entity with two long-term rental housingand holds another general rental housing it is regarded as three house ownersregardless of whether it is leased out or not. Therefore income tax shall belevied on aggregated monthly rent and deemed rent for security deposits.

* Calculation of separatetaxation on income tax

In accordance with revised taxation law arental business entity has been given an option to pay taxes based on separatetaxation system. Its calculation is as follows,

[Total income * (1- necessary expense rate) –deducted tax amount] * 14

{Necessary expense rate and deducted taxamount}

^*1 Tax deductionwill be applied when the total income, except rental housing income, does notexceed KRW 20million.

^*2 Wherethe income amount is below the one to be exempted from taxation the dependentsof the insured is still eligible for national health insurance even the insuredhas another source of income.

* Registration as rentalbusiness entity

From 2019 as rental business entities withsmall-scale housing are allowed to have options between separate taxation and globaltaxation all rental business entities are required to register in order toenhance the efficiency of taxation. If not registered additional taxes will belevied for that. With exception of the two following cases. When a single houseowner has rental income it is not subject to taxation and a two house owner hassecurity deposits as income is also not subject to taxation.

(*) 2 percent of the total income from housingrental business will be levied as penalty tax from 2020.

(*) Those who started rental business beforeDecember 2019 have to register before Jan 21, 2020.

 

 

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