How to Avoid Gift Tax Bombs in 'Family Transactions'? [Ryu Taemin's Real Estate A to Z]

If Sold 30% or Over 300 Million Won Below Market Price, Considered Gift
May Be Subject to Double Taxation Including Capital Gains Tax

[Image source=Yonhap News]

[Asia Economy Reporter Ryu Tae-min] As the comprehensive real estate tax rate increases, the holding tax burden on multi-homeowners is rising, leading to an increase in sales or gifts among family members. At first glance, transactions between family members may seem similar to gifts since the real estate is given to family, but there is a clear distinction under tax law. If the tax authorities determine it as a gift, a heavy tax burden may be imposed, so caution is necessary.

To be recognized as a transaction between family members, a ‘fund transaction’ must first take place. If there is no actual fund transaction, it falls under Article 44 of the Inheritance and Gift Tax Act (Inheritance-Gift Act) and becomes subject to gift tax. For this, it is essential to keep records of the sales contract and the transaction details of the payment. In particular, having a licensed real estate agent prepare the contract at the time of signing is also a good method.

Even if funds are exchanged, the property should not be sold at a price significantly lower than the market value. According to Article 35 of the Inheritance-Gift Act, if the transaction price between related parties is 30% or more, or 300 million KRW or more below the market price, it is considered a gift. Usually, the market price is based on the prices listed on KB Real Estate Live On.

For example, if an apartment valued at 1.5 billion KRW is sold to a child for 1.2 billion KRW, although the difference is less than 30% of 1.5 billion KRW (450 million KRW), since the sale price is more than 300 million KRW lower, it is subject to gift tax. Similarly, if a 300 million KRW apartment is sold to a child for only 200 million KRW, the difference exceeds 30% of 300 million KRW (90 million KRW), so it is also taxable.

The problem is that if it is deemed a gift, both gift tax and capital gains tax must be paid. In this case, the capital gains tax is based on the current market price, not the gift price, so no matter how cheaply it was transferred, the capital gains tax burden cannot be avoided. According to Article 101 of the Capital Gains Tax Act, if the sale price is 5% or more below the market price, capital gains tax must be paid based on the market price. However, similar to the application of the Capital Gains Tax Act, if the transferring parent qualifies for the one-household one-property exemption, capital gains up to 900 million KRW calculated at market price can be exempted.

It is also important to keep records that can prove the appropriateness of the sales contract. A representative example is whether there was direct or indirect assistance from others in raising the transaction amount, or if a loan was taken from a related party, whether it was appropriate. If this cannot be substantiated, the authorities will judge based on occupation, assets, etc., and if it is determined that acquisition ability is impossible, gift tax may be imposed.

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