[Ryu Taemin's Real Estate A to Z] Real Estate Under-the-Table Contracts, What Are the Penalties if Caught?

Penalty of up to 5% of the actual transaction price upon detection
Additional tax imposed for false reporting or late payment
No exemption or tax reduction benefits granted

A real estate agency in a densely populated apartment complex in Seoul. Photo by Hyunmin Kim kimhyun81@

[Asia Economy Reporter Ryu Tae-min] As housing prices soar sharply, the burden of capital gains tax and acquisition tax on houses has increased, leading to a rise in cases of using down contracts. While some consider lowering the price slightly and making a down contract as a customary practice, caution is necessary because strict penalties and disadvantages may be imposed if caught.

A down contract refers to an agreement between the seller and buyer that records a false price lower than the actual transaction price. Down contracts are usually made to reduce the taxes to be paid. By reporting a transaction price lower than the actual price on the contract, the seller can reduce capital gains and thus capital gains tax, while the buyer can reduce the acquisition cost and thus acquisition tax. Conversely, there are cases where an up contract is made, recording a false price higher than the actual transaction price to increase the loan limit. This is because the loan limit can be obtained within a certain percentage of the sale price.

However, such contracts are clearly illegal, and if detected, the losses may exceed the benefits gained. According to Article 3 of the Act on Reporting and Using Specified Real Estate Transaction Prices, if the actual sale price and the reported price differ, the parties involved may be fined 2-5% of the actual transaction price. In addition, unpaid taxes will be collected, and both the penalty for inaccurate reporting and the penalty for late payment must be paid.

Disadvantages may also occur in tax reductions or exemptions. If a down contract is detected in the sale of apartment or officetel pre-sale rights, the buyer cannot enjoy any tax exemption benefits even if they meet the one-house tax exemption conditions after the apartment’s completion. Also, if a down contract is detected, tax reduction benefits through rental business registration will not be available.

Even if the seller and buyer agree to write a down contract and later the buyer changes their mind and reports the original contract price, this is not recognized as a valid reason to cancel the contract. Attorney Cho Seoyoung of Law Firm Rowin said, “Writing a down contract becomes a weakness for both seller and buyer, causing additional problems such as not being able to confidently demand fulfillment of contract terms,” and advised, “If a down contract is unavoidable, it is better to voluntarily report it before it becomes an issue.”