Apartment Underpriced Transactions Among Family? ... Tax Bomb for Trying to Save a Few Bucks

The price must be traded within 5% or 300 million KRW range

On the 22nd of last month, when the National Tax Service began sending comprehensive real estate tax notices, an apartment complex in the Yeouido area was viewed from the observatory at 63 Square in Yeouido, Seoul. Photo by Kang Jin-hyung aymsdream@

In the metropolitan apartment market, which had been soaring steeply, the number of transactions at declining prices is gradually increasing. Some low-price transactions are suspected to be between family members or special relations for tax-saving purposes.

However, easily conducting low-price transactions does not align with the goal of tax reduction at all. If one attempts to reduce capital gains tax by trading real estate among family members at prices excessively lower than the market value, they may face a heavy tax burden later. Family transactions are also a major monitoring target for authorities.

According to tax law, real estate transactions between family members are basically regarded as 'gifts' rather than transfers. This is to prevent cases where sales are disguised to evade gift tax, which is higher than capital gains tax. However, if it can be proven through sales contracts, financial transaction statements, and income verification documents that the transaction was a legitimate sale, it can be recognized as a sale.

In this process, it is important to conduct transactions at an appropriate sale price. Real estate transactions between family members must be conducted within the range of 5% or 300 million KRW lower than the market price, whichever is less. If this is violated, the sale price will not be recognized, and capital gains tax will be imposed based on the market price.

For example, when trading an apartment worth 1.5 billion KRW, the transaction must occur within the range of 1.425 billion to 1.5075 billion KRW. If it is reported as sold for 1 billion KRW, the sale price will not be recognized, and it will be considered an improper transaction, resulting in capital gains tax based on the market price of 1.5 billion KRW.

Additionally, the transaction price between family members must not deviate from 30% or 300 million KRW of the market price. If it exceeds this range, the person who gains must pay additional gift tax. For instance, a house with a market price of 1 billion KRW is considered normal if sold between 700 million and 1.3 billion KRW. Even if this house is sold for 500 million KRW, tax law considers 700 million KRW as the normal transaction price. Gift tax will be imposed on the 200 million KRW difference.

Status of Comprehensive Real Estate Tax Payers in Seoul City

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Meanwhile, as the tax burden increased due to the rapid rise in apartment prices, the gift boom for apartments continued strongly this year as well, following last year. According to the Korea Real Estate Board, the number of apartment gift cases nationwide from January to September this year was 60,354, the second highest since related statistics began in 2006.

The highest capital gains tax rate for multi-homeowners increased from 65% to 75% starting in June. Including local taxes, the rate reaches as high as 82.5%. Moreover, the comprehensive real estate tax rate for multi-homeowners rose sharply from 0.6?3.2% last year to 1.2?6.0% this year, making the burden the largest ever.

Furthermore, as the government continues to raise the fair market value ratio applied to official property prices to calculate the tax base, the gift boom is expected to continue for the time being.

This content was produced with the assistance of AI translation services.