[Real Estate AtoZ] House Prices Are Falling... Why the Rush to Gift?

Apartment buildings in the Seoul area (Photo by Yonhap News)

[Asia Economy Reporter Ryu Taemin] Despite the ongoing decline in real estate prices, the proportion of gift transactions in housing deals this year reached an all-time high. At first glance, it seems advantageous to wait longer to gift properties as the costs associated with gifting decrease alongside falling house prices. However, with the transaction freeze making even quick sales difficult and related taxes expected to increase from next year, many have rushed to make gifts ahead of time.

According to the Korea Real Estate Board's housing transaction cause status, among the total 79,486 housing transactions in Seoul from January to September this year, 9,901 were gift transactions, accounting for 12.5% of the total. This is the highest figure since statistics began being compiled and is 3.7 percentage points higher than the national average of 8.8%. As direct transactions, including gift transactions, have increased, the Ministry of Land, Infrastructure and Transport announced on the 17th that it will conduct three rounds of intensive planned investigations to crack down on suspicious illegal apartment transactions.

The reason gift transactions remain frequent despite strict crackdowns and the real estate downturn is that the acquisition tax burden related to gifts will increase from next year. Starting January 1, next year, the tax base for acquisition tax incurred during gifting will change to the market-recognized value. Acquisition tax is calculated by multiplying the tax base by the acquisition tax rate, and currently, the tax base for gifts is based on the publicly announced price, which differs significantly from the market price. Typically, the market-recognized value is more than 1.5 times higher than the publicly announced price. Therefore, from next year, when the market-recognized value becomes the tax base for acquisition tax on gifts, the acquisition tax burden will inevitably increase accordingly.

Another factor is that methods to reduce capital gains tax burden through gifting are becoming more complicated. In the case of housing, if a property is gifted to a family member and then sold, capital gains tax can be reduced. For example, if a house purchased for 400 million KRW is sold for 1 billion KRW, the capital gain is 600 million KRW. However, if the house is transferred to a spouse when its value is 800 million KRW and later sold to a third party for 1 billion KRW, the capital gain reduces to 200 million KRW. Capital gains tax is a tax imposed on the profit made from selling real estate.

However, to prevent capital gains tax avoidance through such indirect gifting, the tax law operates a gift tax deferral system. Deferral taxation means that if land or buildings gifted to special related parties such as spouses or direct ascendants/descendants are sold within a certain period, the capital gain is calculated based on the acquisition price at the time of the gift.

Currently, deferral taxation is excluded if the sale occurs after five years from the gift, but from next year, this period will be extended to ten years. This means the holding period required to enjoy capital gains tax reduction effects after gifting doubles compared to before. Therefore, if considering gifting, the general industry consensus is that rushing to gift within this year can bring forward the timing of future sales and reduce taxes.