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SEJONG, Aug. 28 (Yonhap) -- South Korea said Wednesday that it will lower the tax rates on home purchases as part of efforts to stimulate the persistently sluggish property market by encouraging transactions.
The move is part of measures that the government unveiled to boost transactions and ease suffering of people -- mostly low- and middle-income households -- who seek to rent a home.
The government said that it will cut the acquisition tax rate on houses valued at less than 600 million won (US$536,200) to 1 percent from the current 2 percent. The tax levied on homes valued at between 600 million won and 900 million won will remain the same at 2 percent, while tax on those over 900 million won will be lowered to 3 percent from the current 4 percent.
The tax reduction comes amid an outcry from provincial governments that worry it could lead to a cut in their tax revenue going forward since the acquisition tax is a local tax.
The government promised to compensate for a cut in their revenue and said that it will announce detailed compensation methods in September.
"Though the tax reduction must be approved by lawmakers before going into effect, we, in principle, expect to see the rates lowered starting next year," a government official said.
"Whether it will be applied retroactively should be decided through consultations in the National Assembly and also based on how much the government will be able to compensate for revenue shortfalls for regional governments," he added.
In a press briefing held later in the afternoon, Finance Minister Hyun Oh-seok, who also serves as deputy prime minister, confirmed that when the tax cut will go into effect will depend upon the National Assembly.
"We still need to review the timing of the tax cut, but at the end of the day, it boils down to whether this will be approved by lawmakers, and this is crucial to boost the overall home transactions," Hyun told reporters. "We are now having close consultations with the ruling party (on this matter)."
In addition, the government said that it will expand the supply of long-term, low-interest rate mortgages in order to ease the financial burden on people seeking to buy new homes.
It also plans to purchase already-built houses and put them up for rent during the second half in order to ease shortages in the rental market.
The government said that it plans to stimulate the supply of rental homes not just in the public sector but also in the private sector through cutting interest rates and raising the maximum loan for individuals seeking to buy homes for the purpose of renting them out.
"We expect these measures to stimulate transactions and turn the demand for rental homes to the demand for house purchases," the government said in a press release.
"In addition, through income deduction for monthly rental fees and other tax and financial supports, we expect to help ease housing expenditure for low- and middle-income earners struggling to cope with the home rental market, which is undergoing a structural change," it added.
The average cost in renting homes under the so-called jeonse system here has risen 2.1 percent so far this year until July, and the prices are showing signs of rising faster recently as people prefer renting to buying homes for fear of further falls in home prices.
Jeonse is a unique home rental system in the country, under which a tenant pays a large lump-sum deposit to lease a home instead of paying monthly rent for usually two years.
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