Interest in Apartment Family Transactions Due to Tax Pressure... Risk of Tax Bombard

Intra-family transactions are considered 'gifts'
Sale prices must reflect market value

The weekly increase rate of apartment prices in the Seoul metropolitan area rose to the highest level in 8 years and 8 months since the Korea Real Estate Board began compiling statistics in May 2012. Apartment prices in Seoul have also continued to rise for three consecutive weeks since the new year, showing little sign of stabilization. The Korea Real Estate Board (formerly the Korea Appraisal Board) announced on the 21st that the nationwide apartment sale prices increased by 0.29% in the third week of January (as of the 18th), up from 0.25% the previous week. By region, apartment prices in the Seoul metropolitan area rose by 0.31%, marking the highest increase rate in 8 years and 8 months since the Real Estate Board started compiling statistics. The photo shows apartment complexes in Seoul city viewed from 63 Square in Yeouido, Seoul, on the morning of the same day.

As real estate tax pressure targeting multi-homeowners intensifies, interest in real estate transactions among family members is growing. However, caution is required because if transactions are conducted at prices excessively lower than market value with the intention of reducing capital gains tax in family real estate deals, it can result in a heavy tax burden.

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 as transactions between family members to avoid paying gift tax when it exceeds capital gains tax. However, if it can be proven through sales contracts, financial transaction statements, income verification documents, etc., 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. Family real estate transactions must be conducted within the range of 5% of the market price or KRW 300 million, whichever is lower. If this rule is violated, the sale price will not be recognized, and capital gains tax will be imposed based on the market price.

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

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

Meanwhile, after the government introduced a series of high-intensity real estate tax increase measures targeting multi-homeowners last year, apartment gifts have surged significantly.

According to the Korea Real Estate Board's apartment transaction status, apartment gifts nationwide last year totaled 91,866 cases, the highest since related statistics were first published in 2006. In particular, the number of apartment gifts in Seoul last year was 23,675 cases, a 1.9-fold increase compared to the previous year (12,514 cases), setting a record high.

In the government's July 10 measures last year, the comprehensive real estate tax top rate for multi-homeowners was raised from 3.2% to 6.0%, and the top capital gains tax rate was increased from 42.0% to 45.0%. These measures have been in effect since January this year.