Preventing Tax Evasion When Transferring Houses with Jeonse... Acquisition Price Unified to Standard Market Price

[Asia Economy Sejong=Reporter Dongwoo Lee] The tax-saving effect of burdened gift transfers, where parents pass on a house to their children while having a jeonse deposit or bank loan, is expected to decrease significantly in the future.

According to the Ministry of Economy and Finance on the 19th, the government is pushing for an amendment to the Enforcement Decree of the Income Tax Act to unify the acquisition cost to the standard market price when burdened gift transfers of houses occur. Even if the house transfer price in a burdened gift transfer is the rental deposit, the standard market price will be regarded as the acquisition cost.

[Image source=Yonhap News]

A burdened gift transfer refers to a case where a house is gifted while there is a lease or loan attached. In such cases, for houses like officetels that have not been traded in recent years, it is difficult to estimate the market price, so the rental deposit is set as the house transfer price.

For example, if a parent acquired a house in the past at a market price of 200 million KRW (assuming a standard market price of 160 million KRW, 80%), and the current jeonse deposit is 300 million KRW, and there are no recent sales cases making the market price unclear, the house value is considered to be 300 million KRW.

If the parent gifts the house while having a jeonse deposit, the child must later return the 300 million KRW jeonse deposit to the tenant, effectively inheriting the parent's debt along with the asset. In this case, the net asset value (asset - debt) inherited by the child from the parent is effectively zero (house value - deposit), and the gift tax is also zero.

To prevent cases of gift tax avoidance through such burdened gift transfers, the government imposes a separate capital gains tax on the parent. Similarly, since the parent effectively transfers a debt of 300 million KRW to the child, it is considered that the parent has earned 300 million KRW in capital gains for tax purposes and will be taxed accordingly.

The capital gains subject to capital gains tax (asset - acquisition cost) are calculated based on the standard market price. Setting the acquisition cost as the standard market price increases the capital gains under tax law and thus the tax burden. In the above example, the capital gains based on the market price is 100 million KRW, but based on the standard market price, the capital gains is higher at 140 million KRW. The government explained that this amendment is intended to prevent tax avoidance using burdened gift transfers.