Including 'maintenance fees' in the value when gifting a building to children?…Court says "Not rent"

The court has ruled that maintenance fees are not included in the real estate rent used as the basis for calculating capital gains tax.

According to the legal community on the 3rd, the Administrative Court of Seoul, Administrative Division 4 (Chief Judge Kim Jeong-jung) recently ruled against Plaintiff A in a lawsuit filed against the Yongsan Tax Office seeking cancellation of a capital gains tax imposition.

Seoul Administrative Court

In January 2018, Mr. A gifted half of the land and buildings he owned in Seocho-gu, Seoul, to his two children. This included debts of 4 billion KRW in real estate loans and 680 million KRW in lease deposits. When reporting gift tax, Mr. A’s children declared the gift property value based on the larger amount between the 'standard market price' of approximately 6.07 billion KRW, assessed under Article 61, Paragraph 1 of the Inheritance and Gift Tax Act (IGTA), and the 'converted rental value' of approximately 6.252 billion KRW, assessed under Paragraph 5 of the same article.

However, the tax authorities held that the amount gifted by Mr. A should be assessed based on the standard market price, not the converted rental value. In particular, Mr. A argued that the maintenance fees received from tenants should be included when calculating the converted rental value, claiming that maintenance fees also have the substance of rent. The Yongsan Tax Office, however, excluded maintenance fees from the calculation and found that the converted rental value without maintenance fees was less than the standard market price, thus imposing tax based on the standard market price. Accordingly, in June 2021, Mr. A was assessed a total capital gains tax of 2.8 billion KRW, which was higher than the approximately 800 million KRW previously paid. Mr. A filed a lawsuit in objection.

The court rejected Mr. A’s claim, stating that maintenance fees cannot be considered rent. The bench stated, "Maintenance fees are costs that tenants must bear as actual expenses incurred from using the leased building and should not be regarded as rent." Furthermore, the court noted, "The purpose of the IGTA provision that sets the property value as the larger amount between the converted rental value and the standard market price is to estimate the inheritance and gift property value closest to the market price based on objective exchange value." It pointed out, "The maintenance fees received by Mr. A were used for cleaning, managing, and repairing common areas of the building and cannot be considered compensation for the objective exchange value of the real estate," and dismissed all of Mr. A’s claims.