High-value home abusive gifting restrictions tighten, family transactions to watch out for

government's proposal to curb abusive transfers of high-priced homes

the government has recently announced a strong regulatory proposal to curb abusive gifting of high-value homes: if a family member sells a property in a regulated area for significantly less than the market value, it will be considered a gift and subject to an acquisition tax of up to 12%.

as some high net worth individuals have been evading the burden of gift tax and acquisition tax through inter-family transactions, the government is now putting in place institutional mechanisms to prevent such transactions. The strengthening of the regulation is driven by the frequent occurrence of abusive transfers, especially of high-priced homes in the targeted areas.

current system of real estate transactions between family members

currently, when a parent gives a house to a child, the child is required to pay both gift tax and acquisition tax. the acquisition tax is basically 3.5%, but the tax rate is as high as 12% when a multi-family home is gifted in an adjustment target area with a market value of more than 300 million won.

on the other hand, in a paid transaction, that is, a sale and purchase transaction where actual money is exchanged, the acquisition tax is much lower, ranging from 1% to 3%. This difference in tax rates has led to many attempts to reduce the tax burden by borrowing the form of a sale, even though it is actually a gift.

even a real estate transaction between family members can qualify as a gift if you can prove that money actually exchanged hands. in this case, the acquisition tax is significantly reduced from a maximum of 12% to a maximum of 3%, and the child does not have to pay any gift tax at all. however, the parent will still have to pay capital gains tax.

conditions for applying the 12% gift tax rate in the adjustment zone

the adjustment area includes all 25 boroughs of Seoul and 12 regions of Gyeonggi Province. in Gyeonggi-do, this includes Gwacheon, Gwangmyeong, and Seongnam-si's Bundang-gu and Sujeong-gu and Jungwon-gu, Suwon's Yeongtong-gu and Jangan-gu and Paldal-gu, Anyang's Dongan-gu, Yongin's Suji-gu, Uiwang-si, and Hanam-si.

in these areas, a higher gift acquisition tax rate of 12% will be applied to multi-family owners who receive a gift of a home with a listed value of 300 million won or more. this is part of a policy to prevent the real estate market from overheating and curb multiple home ownership.

requirements for family transactions to be recognized as arm's length transactions

in order for an inter-family transaction to qualify as an arm's length transaction, it must meet several stringent conditions.

first, the buyer must clearly demonstrate that the transaction was self-funded: they must provide objective evidence that they actually funded the transaction through their own income, property, or loans.

second, the transaction price shouldn't be too far out of line with the market value. according to the Inheritance and Gift Tax Act, for a transaction between family members to qualify as a normal transaction, the transaction price must not be less than 30% of the market value or 300 million won, whichever is less.

for example, if the market value of a house is 1 billion won, a transaction for less than 700 million won may be suspected as a gift, since 300 million won is less than 30% of the market value. for a house with a market value of 500 million won, 30% of 150 million won is smaller than 300 million won, so trading below 350 million won could be problematic.

changing real estate transaction regulations between family members

in the future, a system will be implemented that will deem real estate transactions between family members to be a gift rather than a simple sale if the transaction amount differs from the market price by a certain amount. In other words, if a property is sold at a price that is too low compared to the market price, it will be considered a gift and subject to a gift acquisition tax rate of up to 12%.

however, the specific criteria have not yet been finalized, and further discussion is needed on whether only the portion of the purchase price that is different from the market price will be considered a gift or the entire transaction will be considered a gift.

for example, if a house with a market value of 1 billion won is traded for 500 million won, it is not yet clear whether only the difference of 500 million won or the entire transaction of 1 billion won is considered a gift. The actual tax burden can vary significantly depending on this, so it is important to pay close attention to the detailed criteria that will be announced in the future.

the tightening of the regulations is aimed at preventing the transfer of wealth through abusive gifting and promoting tax equity. if you're planning a family real estate transaction, it's important to consult with a professional to ensure you're following the proper procedures.

frequently asked questions

Q1. Is a real estate transaction between family members considered an unconditional gift?

A. No. As long as there is an actual monetary transaction and the buyer can prove that he or she financed the purchase with his or her own money, it can be recognized as a normal paid transaction. however, if the price is lower than the market price by more than 30% or 300 million won, whichever is less, it may be suspected of being a gift.

Q2. Doesn't this regulation apply in non-adjustment zones?

A. Although this regulation is mainly targeted at the adjustment target areas, the principle of deeming a large difference between the market price and the transaction price in family transactions as a gift can be applied nationwide. regardless of the region, the normal transaction requirements must be met.

Q3. When does the 12% gift acquisition tax apply?

A. Currently, the 12% gift tax applies when a multi-family residence is gifted in an adjustment target area with an assessed value of 300 million won or more. in the future, this tax rate will also apply to transactions between family members that are considered to be a gift.

Q4. How do I prove my ability to finance a parent-child transaction?

A. You need to prove that the buyer was actually able to finance the transaction through proof of income, proof of deposit balances, loan agreements, etc. buying with inherited money does not qualify as self-financing.

Q5. Does the rule apply retroactively to family transactions that have already occurred?

A. It has not yet been finalized whether the new rules will be applied retroactively. Generally, tax law changes will apply to transactions after the effective date, but the specific timing and scope of implementation will be announced at a later date.

wrapping Up

the increased regulation of abusive gifting of high-priced homes requires a more cautious approach to family real estate transactions. it's important to make sure that you follow the proper procedures, as a transaction at a price below market value could be considered a gift and subject to a higher acquisition tax of up to 12%.

if you're planning a family real estate transaction, we hope you found this article helpful. If you have any questions, please leave a comment. for more great real estate tips, please subscribe and set up alerts.