Contractual Errors Causing Loss of Tax Benefits Under Jeonse/Wolse Cap: A Guide to Mistakes and Solutions

The Reality of Tax Disadvantages Caused by Contractual Errors

Key Requirements for Excluding Multi-Home Owners from Capital Gains Tax Surcharges

The Jeonse/Wolse Cap is not merely a control mechanism to limit rent increase rates to within 5% per annum for landlords. It serves as a pivotal bridge offering massive tax benefits. When a multi-home owner sells a property, they are typically subject to high tax rates ranging from 6% to 12%. However, if they have entered into and maintained a lease contract that applies the Jeonse/Wolse Cap, they can avoid this capital gains tax surcharge. The biggest advantage is that this benefit is granted regardless of whether the landlord is registered as a rental business operator.

However, the National Tax Service strictly examines whether the application of this system is explicitly stated in the 'Special Terms' section of the contract, regarding it as a key formal requirement for tax benefits. Simple errors in describing the purpose or the omission of clauses can make it impossible to avoid capital gains tax surcharges amounting to tens of millions of won. This results in a tax bomb solely due to the absence of a single line of text in the document.

Linkage with Long-Term Holding Special Deduction and Property Tax Reductions

In addition to excluding capital gains tax surcharges, contracts subject to the cap are directly linked to the benefits of the Long-Term Holding Special Deduction. If a rental property subject to the cap is held for more than 10 years and then sold, a 40% deduction is applied to the calculation of capital gains tax. Furthermore, it serves as a standard for determining whether one qualifies for deductions or reductions in the calculation of the Comprehensive Real Estate Tax.

Since 2024, as loan regulations such as the Total Debt Service Ratio (DSR) have become deeply linked to the scope of 'residential use' recognition, the importance of classifying housing types has grown more than ever. If the housing type on the contract is incorrectly listed as non-residential, such as a store or neighborhood facility, one stands to lose not only tax reductions but also mortgage loan benefits.

How to Draft Lease Contracts to Preserve Tax Benefits

Clear 'Residential Use' Marking for Housing Type and Purpose

The starting point for all tax benefits is having the property recognized as 'residential use' in the documents. In the housing type section of the standard contract form, one must write the exact residential form, such as a detached house or multi-family house. It is strictly forbidden to use forms intended for leasing non-residential spaces like stores or offices as they are.

Even if the property is in reality a perfect residential house with three bedrooms and a bathroom, if the purpose is listed as a store or office, the tax authorities will not recognize it as a rental property. This is because authorities prioritize formal document requirements over substantive facts.

Specifying Retroactive Application for Contracts Signed Before August 18, 2021

The Jeonse/Wolse Cap was fully implemented in July 2021 but applies retroactively to existing tacit renewal contracts signed before August 18 of the same year. This means that even older contracts, currently valid, are included in the scope of tax benefits. However, widespread cases are occurring where both landlords and tenants forget this fact and suffer disadvantages by failing to include a retroactive application clause.

It must be clearly stated that the old contract signed before August 18 is being interpreted in accordance with current legal relations. If one fails to prove that the contract is subject to the cap, there is a high risk of issues arising regarding exceeding the annual rent increase limit or denial of rental housing requirements.

Essential Content for the Special Terms Section

The most certain and safe preventive measure is to explicitly state relevant phrases in the 'Special Terms' section of the contract. The document must state that this contract is subject to the Jeonse/Wolse Cap according to the Housing Lease Protection Act. Especially for existing contracts, it is essential to clearly indicate the intention for retroactive application, documenting that the legal relations from the time of the original contract have been revised to fit current standards.

Relief Procedures and Practical Responses for Incorrectly Signed Contracts

Correction through Lease Agreement Changes and Renewals

There is no need to panic if the housing type is incorrectly described or the cap application phrase is missing. If the landlord and tenant mutually agree to draft a new 'Contract Change Agreement', the formal requirements can be supplemented. Alternatively, one must ensure the clause is added when drafting a renewal contract before the existing contract period expires. These correction procedures must be completed before the date of transfer or the tax standard date, which is the point when tax benefits are determined, to be effective.

Securing Evidence to Submit to Tax Authorities

Since 2023, Supreme Court precedents and the National Tax Service's administrative guidelines have shifted from strict formalism to substantive realism. The practice has changed to recognize rental housing requirements as met even if the contract phrase is missing, provided the actual rent increase rate is clearly within 5%. Accordingly, securing objective data that proves the substantive transaction facts is the key to relief.

One must secure bank transaction statements or rent payment receipts to prove that the annual increase rate was less than 5%. Submitting a 'Substantive Lease Confirmation Letter' signed by the tenant serves as very powerful corroborating evidence. It is also advisable to submit a resident registration copy or utility payment records that can confirm actual residency in the housing.

If one has already overpaid capital gains tax or was excluded from benefits during a tax audit, a rectification claim (administrative appeal) can be filed. The procedure involves submitting the rectification claim and prepared proof materials to the competent tax office to demonstrate that the property was substantively a rental property subject to the cap. If rejected at the tax office level, one can proceed to the Tax Tribunal. Due to recent judicial precedents prioritizing substance over form, the taxpayer's win rate has become significantly high.

Managing Tax Risks of Dual Contracts and False Entries

One must be cautious that relief procedures do not condone false entries or dual contracts aimed solely at evading taxes. Creating a 'downward contract' (under-the-table contract) that manipulates the paper trail to show a rent increase of under 5%, while actually raising the deposit or monthly rent by over 7% for the tenant, constitutes a clear violation of tax law.

This can lead to surcharges for tax evasion suspicions as well as criminal penalties, so it should never be attempted. Based on the premise that actual rental conditions strictly observe the Jeonse/Wolse Cap, one must follow the correct procedure of safely supplementing only the insufficient formal contract documents.