[Practical Finance] Intensified Investigation into Housing Purchase Funds... Unprepared Buyers Face 'Big Trouble'

Government "Continuous Source of Funds Investigation for High-Priced Home Sales"
Increasingly Stringent Government... Prepare in Advance
Errors in Source of Funds May Lead to Gift Tax and Penalties

[Asia Economy Reporter Moon Jiwon] As the government declares a 'war on speculation' and imposes various regulations to curb soaring housing prices, caution is required from prospective buyers and investors. If one plans to buy or invest in housing without fully understanding the changed regulations, they are likely to face setbacks.

If you are about to purchase an existing home, the most important thing to pay attention to is the 'Funding Plan.' Since the government is rigorously investigating the sources of housing purchase funds, it has become essential to prepare for source verification even before the transaction. Mistakes in the funding plan can lead to not only gift tax but also fines, so be careful not to make errors in proving your funds.

◆ Trouble if you carelessly fill out the Funding Plan = According to the government and industry sources on the 5th, starting next month, when trading housing in speculative overheated districts and regulated areas such as Seoul, a funding plan must be submitted to the local government regardless of the transaction amount. Currently, a funding plan is only required for housing transactions over 300 million KRW in these areas, but the government has significantly expanded the submission scope through the recent June 17 real estate measures.

Speculative overheated districts include Seoul, Gwacheon and Bundang in Seongnam, Gwangmyeong, Hanam, Suwon in Gyeonggi Province, Suseong in Daegu, and Guri. Except for Suseong in Daegu, all speculative overheated districts are also included in regulated areas. Since most areas in the metropolitan area fall under this, residents of Seoul and Gyeonggi Province are largely subject to submitting a funding plan.

As the government has effectively declared war on real estate speculation to curb soaring housing prices, it is highly likely that real transaction investigations through funding plans will be conducted more rigorously in the future. Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki also announced at the '1st Real Estate Market Inspection Ministerial Meeting' that "suspicious transactions regarding the source of funds for housing transactions over 900 million KRW will be continuously investigated."

The funding plan is broadly divided into 'own funds' and 'borrowed funds.' Own funds are further subdivided into deposit amounts, proceeds from stock and bond sales, gifts and inheritance, cash, and proceeds from the disposal of existing real estate. Borrowed funds include loans from financial institutions (mortgage loans, credit loans, other loans), rental deposits, company support funds, and private loans.

Previously, supporting documents were only required when trading housing over 900 million KRW in speculative overheated areas, but now they must be submitted unconditionally. For example, if you supplemented your purchase funds with money gifted from your parents, you must submit the gift tax report and tax payment certificate; if you received company support funds, you must submit documents proving this.

What happens if you report money received free of charge from your parents as your own cash? According to current law, since the government finds it very difficult to verify such gifts, there is a basic 'gift presumption' rule that requires the real estate acquirer to prove that it is not a gift.

In other words, if the tax authorities judge that the acquirer cannot realistically hold the amount of cash stated in the funding plan considering their occupation, age, and income, they may deem it a gift and impose a huge gift tax. If the acquirer fails to prove it is not a gift or if the real transaction investigation confirms it is a gift, the acquirer must bear not only the gift tax but also additional taxes for non-reporting. This is why the source of funds investigation conducted by the National Tax Service is so daunting.

◆ Leave clear evidence for borrowed money = So what preparations should buyers make before purchasing a home? First, avoid using illegal methods such as disguised gifts or sales between parents and children or illegal transactions using corporations. In fact, at the end of last month, the National Tax Service selected 413 people for investigation, including those under 30 who purchased high-priced apartments without clear income and those who purchased homes by receiving foreign currency with unclear sources. Problems were found in the funding plans they submitted. If fraud is discovered after further investigation, criminal penalties may be imposed.

Especially buyers in their 30s, who often lack extensive housing transaction experience, need to be more careful with funding. Since most of them do not have sufficient funds, they often buy homes by taking out maximum loans, which makes them prone to various mistakes or fraud. A representative from A Real Estate Agency in Dongjak-gu said, "Perhaps because housing prices have risen sharply recently, many newlyweds or prospective couples in their 30s are rushing to view homes," adding, "Many ask about loan or funding tricks that do not cause problems." In fact, among the 413 people selected for the National Tax Service investigation, those in their 30s accounted for 47.7%, nearly half.

If you borrow money from your parents to purchase a home, you must enter into a consumption loan agreement that the tax authorities can objectively recognize. Generally, loans between direct relatives are not recognized, so you must have evidence of interest and principal repayment and collateral, and also consider in advance whether the child has the ability to bear the interest and principal.

It is also advisable to prepare proof of the source of acquisition funds in case of future real transaction investigations. If the acquisition amount is less than 1 billion KRW, you must prove the source of the balance excluding the lesser of 20% of the acquisition amount or 200 million KRW; if the acquisition amount is 1 billion KRW or more, you must prove the source of the balance excluding 200 million KRW. If the proven amount is less than 80%, gift tax may be imposed on the entire amount whose source cannot be explained.

Additionally, if it is a high-priced real estate transaction, it is good to receive tax consultation before the transaction. Even if you do not commit fraud, local governments sometimes impose fines for simple mistakes. If the source of funds is complicated, there is a possibility of unexpected scrutiny from tax authorities.