[Published on September 24, 2024 edition of the "Korean Law Insights" column in the Korea Daily’s Economic Expert Section]
Gifts or transfers during one’s lifetime may sometimes be more advantageous than inheritance
Planning ahead by comparing and reviewing capital gains tax and gift tax
Discussions about amending Korea's inheritance tax system for the first time in 27 years are ongoing. Korea’s inheritance tax rates are comparatively high, with escalating tax rates applied to larger estates. This often results in substantial tax burdens for heirs. A common issue is that heirs may lack sufficient liquidity to pay inheritance taxes, forcing them to sell inherited assets immediately or take out loans to meet tax obligations. This financial strain leads many to explore options like gifting or transferring property to their children during their lifetime.
From an inheritance tax perspective, gifting property may not always seem more favorable. However, since inheritance tax is based on the property’s value at the time of the decedent’s death, gifting may be advantageous if the property is expected to significantly increase in value over time.
Capital gains tax, which is often lower than inheritance or gift taxes, may offer certain benefits, including deductions for long-term ownership or exemptions for one house for one household. Thus, transferring property through a sale during one’s lifetime can generally result in lower taxes compared to inheritance or gifting.
However, real estate transactions between parents and children are presumed to be gifts under Korean tax law. If the real estate transaction is conducted at a price exceeding the normal range defined by law based on the market value, the difference may be considered a gift and subject to gift tax. Additionally, parents selling property below market value may still be taxed based on the fair market value rather than the transaction price under the Income Tax Act.
In other words, for the transaction to avoid being deemed a gift (and thereby subjecting the child to gift tax) and to ensure that the parent is not liable for capital gains tax based on the market value instead of the actual transaction price, the real estate transaction between parents and children must be conducted at a price close to the market value (within the normal range defined under Korean tax law). Additionally, the agreed-upon price must be fully exchanged between the parties.
On the other hand, it is important to note that in real estate transactions, the acquirer’s burden of acquisition tax is also significant. This means that the child must have sufficient financial resources to cover not only the purchase price of the property but also the acquisition tax. Since the parent only needs to use the sale proceeds to pay the capital gains tax, the overall tax burden primarily falls on the child.
In addition to the points discussed above, there are numerous other factors to consider from a tax perspective. Moreover, given that tax laws are revised annually, it is virtually impossible to predict every aspect accurately in advance. Therefore, it is essential to calculate amounts that minimize the parent's capital gains tax and the child's gift tax and acquisition tax, based on the most specific circumstances possible. Examining feasible methods in detail is considered the best approach. For example, one option is to gift or transfer an apartment under the condition of assuming an existing jeonse (lease deposit) contract. Additionally, this approach enables a thoughtful and gradual plan for distributing parental assets to children during their lifetime, which is highly advisable.
▶Inquiries: (424)218-6562
Jin Hee Lee/K-Law Consulting Korean Attorney
[Reference link in original Korean]
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