[Published on June 5, 2024 edition of the "Korean Law Insights" column in the Korea Daily’s Economic Expert Section]
Strategies to Minimize Capital Gains Tax
Consider the Time Required for Inheritance Registration Before Sale
Inheriting real estate in Korea signifies an increase in assets, but it also entails various obligations. One of these is the duty to file and pay inheritance tax. Inheritance tax filing must be completed within six months from the last day of the month in which the inheritance commences (i.e., the deceased's date of death). If both the deceased and the heirs are non-residents of Korea, the deadline extends to nine months.
Heirs must pay the calculated inheritance tax when filing. However, a common issue arises when there is insufficient cash to pay the tax. While Korea’s tax law provides installment payment options, these may not suffice if the total inheritance tax amount is substantial, potentially leaving even the divided payments unaffordable. In such cases, heirs may need to sell the inherited real estate ("inherited property") to cover the tax, but several points require careful attention in this process.
First, selling inherited property is subject to capital gains tax, which is levied on the difference between the acquisition cost and the transaction price at the time the asset is transferred. For inherited property, the acquisition cost is based on its appraised value at the time of inheritance, while transaction price is determined by the actual transaction value. The value of the inherited property (the heir's acquisition cost) is typically defined as its market value as of the inheritance date. This market value may include transaction prices, appraisals, or compensation amounts from expropriation or auctions within six months before or after the inheritance date. If the inherited property is sold within the appraisal period (six months before or after the inheritance date) or within nine months following the tax reporting deadline, the acquisition cost and transaction price may align, resulting in no taxable capital gain. Consequently, capital gains tax may not be incurred.
However, if the sale price exceeds the appraised market value at the time of inheritance, the inheritance tax burden may increase compared to a situation where no sale occurred. While some heirs may have no choice but to sell inherited property to cover immediate tax liabilities, It is generally advisable to compare the effect of avoiding capital gains tax with the impact of inheritance tax before selling inherited real estate.
If it is difficult to sell inherited real estate immediately, one option to consider is obtaining an appraisal and reporting the inheritance tax based on the appraised value as a way to reduce potential future capital gains tax. This involves having the value of the inherited property appraised at a higher value than its value on the inheritance commencement date, thereby reducing the taxable capital gain. However, this approach may also increase the inheritance tax burden due to the higher appraised value. Therefore, it is essential to compare the impact of the increased inheritance tax with the benefit of reduced capital gains tax before making a final decision.
Meanwhile, for an heir to sell inherited real estate, the inheritance registration must first be completed. If any heirs reside abroad, the required documents for the registration process become more numerous and complicated, requiring additional preparation time. Moreover, the documents must go through notarization and the apostille process, which can also take a considerable amount of time. If the heirs reside in multiple countries, the time required for these procedures may increase even further.
Given these circumstances, when planning to sell inherited real estate, it is essential to seek professional advice and comprehensively evaluate both inheritance tax and capital gains tax before making a decision. If the decision to sell is made, it is crucial to promptly prepare the necessary documents and proceed with the required procedures as quickly as possible.
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Jin Hee Lee/K-Law Consulting Korean Attorney
[Reference link in original Korean]
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