As real estate assets value is rising, the amount of housing property is risingas well. On the other hand, I consult a lot of customers who are worried abouthow to safely transfer assets to their children with less tax burden. Iunderstand that the burden of tax due to the sudden rise in the value of achild who has a relatively insufficient economic capacity is due to a large taxburden and that the original purpose cannot be achieved.
General gift tax
Simple gift tax is known as the mostgeneral method of transferring assets to their children. As readers may allknow, in this case, transferred asset’s market value becomes the gift value.Market value of the gift asset is applied in the order of the sales price,appraisal value, and standard market value.
As apartments and officetels can becompared based on the location and size of assets and trade information can beaccumulated, trading case value becomes the basis and other than that, standardmarket price works as market price. However, in case there is an appraisalvalue, the appraisal value is recognized as the market price with priority overthe standard market price. In this case, “Gift Agreement” shall be made and theAgreement shall be attached when reporting the gift tax.
This is mainly used when the asset to bedonated has a down payment deposit or debt. In this case, as the portion of theburden of onerous gift becomes donor’s transfer gains, donor shall bear the transfertax. Recipient shall bear the gift tax on the remainder after deducting theburden of the donor. Normally, many chooses onerous gift with hoping that thetax burden would be reduced as the tax is divided into transfer tax and gifttax.
In fact, some parts are effective. Forexample, in case of donating a single house to a child, most part becomesonerous gift, if the house meets the standard of one house per one generation requirement.This case would lower the burden of the gift tax.
However, it is important to note that insome cases, the tax burden can be increased due to onerous tax. When donor ownsmore than one house when making a donation, tax burden might be increased followedby mounting transfer tax.
When donating certain portion of realestate
In some cases, donor chooses to donatecertain portion of real estate if there’s excessive amount of additional realestate tax. Partial donating is mainly used for buildings. Since, the price of most buildings arehigh. And even if the portion of building is being gifted to child, rent feefor the portion can be shared, which works as a advantage to prepare futurefunding source in advance.
It is important to note that in case of donatingcertain portion of housing, when child and parents are not registered as a samehousehold member, it may be deemed as the child owns his/her house as well,which would make troublesome situation.
In this case, gift shall be made under the“Shares Agreement”, which stipulates a donation would be made as a percentageof total assets(*/n).
When land is owned by parents and buildingis being gifted
This method is being used when hefty amountof gift tax is expected for donating land and building due to increased realestate value. The land which record high price is kept by parents and thebuildings that can be built on the land is registered as the child’s name. Thiscase is mainly used for commercial real estate.
However,in this case, the gift tax is different depending on the method of leasingbusiness for rental property.
1) when operating ajoint-lease business with an asset value ratio
There is a case where calculatingpercentage between land value of parents and child's building valuation, and createa joint venture contract based on the ratio and run a rental business. However,if the ratio of the partnership is different from the ratio of the asset value,the taxpayer shall apply the additional taxation and income tax by applying thenon-fairness calculation rule of the Income Tax Act to the difference in thevalue of the lease. For example, when parent’s renting ration is smaller thanchild’s renting ratio, that part is Later taxed with the income tax to theparent's rental income, and the child is taxed with the gift tax.
2) Parents sign a contract as renting their land to their children.
If the parent who owns the land signs the leasecontract for land use to the child who owns the building, the parent and thechild will each register as a lease business.
In this case, thecalculation of the appropriate rent for land use is as follows;
= Real estatemarket price * 50% * Rental rate (1.8%)
When receivingless than what is prescribed by the tax law, the parent will bear theadditional VAT and income tax for that part and child will be chargedadditional gift tax.
3)When childis using the parent’s land free of charge
If a child owns abuilding and uses the parent’s land free of charge, he or she must pay the gifttax for the portion of the property he or she uses free of charge, ascalculated by the tax law. In this case, the value calculated by using thecurrent rate of 10% of the profit for using the land free of charge and if theamount exceeds 100million KRW, there would be additional tax charge.
Calculation of donation price for freeland use (calculation of gratuitous profit)
= Market value of real estate * 2% *(sum of value calculated at 10% of current rate for 5 years) (3.79079)
(Additional gift tax is charged only ifprofit for using the land free of charge exceeds 100 million KRW)
(If the land value is more than 1.32billion KRW, it will be subject to gift tax)
(For the land which was used less than 5years are excluded from taxable gift tax