parents with apartments in prime areas of Seoul or Gyeonggi Province have a long-standing concern. "If I pass this house on to my children in the future, I'll have to pay too much tax..." The fear is that they could be hit with a tax bomb if they simply 'gifted' their expensive home to their children.

to avoid this burden, many people have utilized a method called "inter-family sale" instead of "gift". However, the government has recently pulled out a strong regulatory card to prevent such abusive transfers.

get it wrong and you could end up paying 12% in tax when you should only have to pay 1%. here's a rundown of the key changes, the current rules, and what you need to watch out for.

table of contents

  1. 12% vs. 1%? The tightrope of gifting and selling

  2. what constitutes 'abusive': What about current family transactions?

  3. government takes a knife to 'abusive gifting': what changes?

  4. frequently Asked Questions (FAQs)

1. 12% vs. 1%? The Tightrope of Gifting vs. Buying and Selling

why have people taken the complicated route of "buying and selling"? There's only one reason: taxes, specifically estate taxes.

the dreaded 12%, the weight of the 'gift tax'

currently, when a parent 'gifts' a home to a child, the child has to pay a 'gift acquisition tax' in addition to the gift tax. the basic tax rate is 3.5%, but what if a parent who owns multiple homes gives a home worth more than KRW 300 million in the 'adjustment target area'? In that case, a heavy tax rate of 12% is applied.

the adjustment area refers to all 25 boroughs of Seoul and 12 areas in Gyeonggi-do, including Gwacheon, Gwangmyeong, Seongnam-si (Bundang, Sujeongsu, Jungwon-gu), Suwon (Yeongtong, Jangan, and Paldal-gu), Anyang-dong, Yongin-si, Suji-gu, Uiwang-si, and Hanam-si. most apartments in these areas have an asking price of more than 300 million won, so you're essentially facing a 12% tax bomb.

the magic of tax savings, the lure of 'inter-family sales'

on the other hand, what if the transaction is recognized as a "sale" instead of a "gift"? The acquisition tax rate that your child will pay will be much lower, ranging from 1-3% depending on the value of the house. the difference between 12% and 1-3% is tens of millions or even hundreds of millions of won.

of course, real estate transactions between family members are presumed to be "gifts" in principle, but if you can prove that money was actually exchanged, i.e., a "paid transaction," it can be recognized as a sale. in this case, the child can avoid paying the 12% gift tax and, in some cases, no gift tax at all, which is called "gift tax avoidance." (Of course, the parent may still have to pay transfer tax.)

2. what qualifies as a "loophole": What about current family transactions?

so what kind of "family-to-family" transaction qualifies as a normal transaction and not an abusive gift? Current law (the Inheritance and Gift Tax Act) sets out two key conditions.

first, you must fully prove that the child 'came up with the money' to buy the house. the source of the money must be clear through proof of income, loan history, etc.

second, there are limits on "below market value" transactions. the market price for inter-family sales is limited to 30% of the market price or 300 million won, whichever is less. for example, if the market price of an apartment is 1 billion won, you can discount it to 300 million won (30% of the market price)... not to 300 million won, which is the lesser of 30% and 300 million won. You can only discount it to 300 million won, which is the lesser of 30% and 300 million won. If the market price is 2 billion won, 30% is 600 million won, but you can only discount it to 300 million won because of the 300 million won limit.

this standard of '30% or 300 million below market price' has been utilized as a conduit for the illegal transfer of high-priced homes.

3. the government puts the knife to 'abusive gifting': what changes?

that's where the government comes in. in an effort to prevent abusive gifting of high-value homes, the government will now consider any real estate transaction between family members to be a "gift" rather than a simple sale if the transaction price differs by more than a "certain amount" from the market value.

when a "sale" becomes a "gift

in other words, if a parent-child transaction occurs at a price that is too far below the market price, we will consider the transaction to be a gift, even if money is exchanged.

the biggest change is this: the moment it's deemed a "gift," the gift tax rate jumps from 1-3% to a "gift tax rate" of up to 12%. in effect, it's a strong signal that the government intends to cut off the gift tax savings from inter-family transfers.

questions still remain

however, the specific thresholds have not yet been finalized. Two questions are key.

first, how much is a "certain amount"? it is clear that it will be much stricter than the current 30%/300 million threshold. Second, will the difference in market value be considered a gift "up to that amount" or will the "whole" transaction be considered a gift and subject to the 12% tax? if the entire transaction is deemed a gift, the ramifications will be unimaginable. This will be discussed later.

4. frequently asked questions (FAQs)

Q: Is the gift of a home valued at more than $300 million in the current adjustment zone really 12%? A : Yes, technically, when a multi-family homeowner "gifts" a home with an assessed value of more than $300 million in the adjustment zone, the recipient is subject to the 12% gift tax rate.

Q: Does this mean that selling a property cheaply between family members is always an 'abusive gift'? A : No, it is not. As long as the child is using his or her own clear funds (self-financed) and paying a 'normal' price that is in line with the market, it can still be recognized as a paid sale. what the government is trying to regulate is transactions that are 'grossly below market value'.

Q: What exactly is the 'market price'? A : Under the Inheritance and Gift Tax Act, the market price is determined by the actual transaction value of the apartment, the value of similar sales, the appraised value, and the open market value (reference price). in general, the actual transaction price within three months before and after the date of the transaction is considered the most favorable price. this also applies to sales between family members.

conclusion: A transparent plan is the answer

the government's move is a strong signal that it will no longer tolerate 'below market value' family transactions and will treat them the same as 'gifting'.

those with high value homes or those planning to pass on a gift to their children should keep a close eye on these changes to the gift tax - sloppy 'tax saving' planning could come back to haunt them. now is the time for transparent financial planning and legitimate tax advice.

what do you think of the new estate gift regulations? Feel free to share your experiences and opinions in the comments. subscribe to get the fastest and most accurate estate tax news.