[Practical Finance] Be Sure to Report to Foreign Exchange Banks When Purchasing Overseas Real Estate

[Asia Economy Reporter Kim Min-young] Korean residents must report to a foreign exchange bank when purchasing overseas real estate. Failure to comply with the reporting obligation results in hefty fines, which are imposed proportionally to the purchase price of the property. The overseas real estate acquisition reporting requirement applies only to Korean residents, but since 2020, Korean nationals, including permanent residents, must also report when purchasing overseas real estate worth 200 million KRW or more for investment purposes other than actual residence. Additionally, money sent for children's study abroad expenses must not be used to acquire overseas real estate or to acquire overseas real estate different from the reported details. Furthermore, if acquisition funds for overseas real estate are remitted multiple times under different names, the National Tax Service will investigate, so it is advisable to avoid dispersing funds through multiple remittances.

When acquiring overseas real estate, domestic real estate-related taxes are not paid, and only taxes on income generated from the real estate must be paid. For example, acquisition tax, value-added tax, property tax, comprehensive real estate tax, and taxes on foreign exchange gains arising from exchange rate fluctuations do not need to be paid domestically. Income tax on rental income and capital gains tax on profits from reselling real estate must be paid domestically. However, if income tax has been paid according to local foreign laws, double taxation can be adjusted by deducting the tax paid abroad from the domestic tax payable or by including it as necessary expenses.

In the United States, an annual holding tax of about 1-1.5% based on the actual transaction price must be paid. For capital gains tax and rental income tax, tax returns must be filed with both U.S. and Korean tax authorities, and the higher tax rate between the two countries is applied. When selling commercial real estate located domestically, a long-term holding special deduction of up to 30% can be received for capital gains tax, but such benefits do not apply to overseas real estate.

Recently, with the depreciation of the Korean won, exchange rates have become a key factor to watch. To invest in U.S. real estate, won must be converted into U.S. dollars to remit the purchase funds. In other words, investing in real estate in the U.S. is equivalent to investing in U.S. dollars. Investment returns vary depending on fluctuations in the KRW-USD exchange rate. If the dollar strengthens after the investment, profits will be made, but if it weakens, even if U.S. real estate prices rise, losses may result. This is why volatility due to exchange rates must be considered.

The U.S. housing market is a seller's market, so commercial real estate listings are quickly sold out if they are good, due to many waiting investors. Domestic investors who must report foreign exchange transactions inevitably face delays in fund execution, making it difficult to secure good listings first. To compensate for this weakness, establishing a local corporation and having investment funds ready in advance is one method. However, the form of the corporation and tax-saving measures should also be considered.

For Japanese real estate, within 20 days of purchase, the acquisition details including the name of the acquirer and the purchase price must be reported to the Japanese government via the Bank of Japan. When purchasing housing in Japan, financing issues must also be considered, as it is quite difficult for foreigners to borrow money from Japanese commercial banks. Tax issues must also be understood in advance when purchasing Japanese real estate. Taxes imposed when acquiring local real estate in Japan include acquisition tax, stamp duty, registration license tax, and consumption tax.

To purchase Australian real estate, approval from the Foreign Investment Review Board (FIRB) must be obtained first. The application fee ranges from approximately 5 million to 10 million KRW depending on the property price. Existing houses can only be purchased for residential purposes and must be sold when returning to the home country. However, newly built houses or apartments can be invested in by anyone.

Vietnam does not have a capital gains tax concept; only 2% of the sale price is paid as tax when selling real estate. However, foreign individuals can only purchase real estate within development project zones, and property use rights are recognized for up to 50 years.