Capital Gains Tax Reinstated: Should Homeowners Gift or Sell Properties?

Fifty-year-old A, a homeowner with three properties, is contemplating the sale of an apartment in Seoul. With the reinstatement of the capital gains tax for multiple homeowners, A is considering selling one of his apartments to reduce his tax burden. However, he is concerned about the taxes involved. Gifting the property to his children would incur gift tax, while selling it would likely result in a significant capital gains tax. Which option is better?

The capital gains tax for multiple homeowners has returned after four years, leading to a rapid increase in family-related gifting transactions. As the tax burden rises, many homeowners are opting to transfer properties to their children rather than putting them on the market. Tax experts emphasize that "gifting is not always the answer," as one must consider not only the gift tax but also acquisition tax and future disposal plans.

According to an analysis by the real estate information app 'Jippoom,' the number of applications for property transfer through gifting in Seoul reached 13,518 in the first half of this year, an increase of 82.9% (6,127 cases) compared to the same period last year. Notably, in April, just before the capital gains tax was reinstated, the number of applications peaked at 3,916, indicating that many multiple homeowners chose gifting over selling due to anticipated tax burdens.

The challenge lies with homeowners who must sell their properties after the reinstatement of the capital gains tax. In designated adjustment areas, selling a home incurs an additional 20 percentage points for those with two properties and 30 percentage points for those with three or more. Consequently, the maximum tax rate can reach 65% for two-property owners and 75% for those with three or more. Including local income tax, the highest rate can soar to 82.5%. Homeowners who have held their properties for a long time will feel the tax burden even more acutely, as they are not eligible for long-term holding deductions.

This situation forces multiple homeowners to engage in complex calculations. They must not only compare capital gains tax but also consider gift tax and acquisition tax to determine the most advantageous option.

To illustrate this, Aju Economy conducted a simulation with Lee Jeom-ok, deputy head of Shinhan Premier Pathfinder. The scenario involved a multiple homeowner with a 135-square-meter apartment in Cheongdam, Gangnam, purchased in 2016 for 1.45 billion won, now valued at 3.45 billion won.

The analysis revealed that, in terms of tax burden alone, selling the property was more advantageous than gifting it. If A gifts the property to his children, the gift tax would amount to 1.228 billion won, and the acquisition tax would be 462.3 million won, totaling 1.665 billion won. In contrast, if he sells it, the total tax burden for a two-property owner would be 1.355568 billion won, and for a three-property owner, it would be 1.5754 billion won. When comparing only the capital gains tax, selling is approximately 390 million won and 90 million won less burdensome than gifting for two and three-property owners, respectively.

However, when considering the acquisition tax that the children would incur upon acquiring the property, the overall tax burden for a three-property owner after selling would be 1.69615 billion won, which is about 31 million won more than gifting, making gifting the more favorable option. For a two-property owner, selling remains advantageous.

Another case involved a multiple homeowner with an 84-square-meter apartment in Yaksu Heights, Jung-gu, purchased in 2006 for 250 million won, now valued at 1.66 billion won.

In this scenario, the capital gains tax for multiple homeowners makes gifting more favorable than selling. If A gifts the property, the gift tax would be 469.48 million won, and the acquisition tax would be 205.84 million won, totaling 675.32 million won.

If he sells, the capital gains tax would skyrocket to 933.83 million won for a two-property owner and 1.08865 billion won for a three-property owner, exceeding the gift tax by approximately 464 million won and 619 million won, respectively. Even when considering the acquisition tax that the children would incur, the total burden for a two-property owner would be 988.61 million won and for a three-property owner, 1.14343 billion won, making gifting the more favorable option.

Ultimately, the key factors in determining tax savings are not the home prices themselves but the acquisition cost, capital gains, and holding period. Properties acquired at a low price long ago that have significantly appreciated may incur a higher gift tax burden, while properties with relatively high acquisition costs or low capital gains may be more affected by the capital gains tax. Additionally, the number of properties held and future inheritance plans can further influence the decision.

Lee Jeom-ok stated, "The reinstatement of the capital gains tax does not automatically make gifting more advantageous, nor does it necessarily favor selling. One must comprehensively consider acquisition costs, holding periods, and the number of properties held to make a decision."

So, is there a way to reduce the burden of gift tax? The tax industry notes that there are cases where 'low-price transfers' are utilized in transactions between parents and children. According to the Inheritance and Gift Tax Act, transactions between special relations can be recognized as normal transactions even if the price is reduced by 30% or less than 300 million won compared to the actual transaction price within the last three months, thus avoiding gift tax. If children can secure funds for the purchase, this method can reduce tax burdens compared to outright gifting.

However, excessive low-price transactions can actually increase tax burdens. Transactions between special relations, such as parents and children, are closely scrutinized by tax authorities regarding the actual source of funds and transaction circumstances. Cases of 'sham transactions,' where properties are transferred to relatives or acquaintances without the ability to pay, are common examples of tax evasion.

If choosing between selling and gifting is difficult, it may be necessary to consider the direction of future tax reforms. The government has indicated plans to adjust the tax system to balance transaction taxes and holding taxes, which could change the advantages and disadvantages of holding properties. The government aims to announce a real estate tax reform plan by the end of this month, focusing on promoting a housing market centered on actual residents. Proposals to adjust both transaction and holding taxes are under consideration.

Market observers are paying attention to the possibility that the plan may include reducing transaction tax burdens while increasing the proportion of holding taxes. The Organization for Economic Cooperation and Development (OECD) has also recommended in its 2023 report on the Korean economy that South Korea's holding tax proportion, currently at 29.4%, is lower than the OECD average of 56.0%, suggesting a need to reduce transaction taxes and increase holding taxes.

However, if holding taxes are strengthened, the burden on multiple homeowners could increase. This is particularly concerning for retirees whose assets are largely tied up in real estate, as they may struggle to pay taxes without sufficient cash flow. Rising official property values could also increase the burden of comprehensive real estate taxes and property taxes, and if the tax reform includes measures to strengthen holding taxes, the tax burden could further escalate.

Experts advise that rather than simply hoping for rising home prices, homeowners should also consider their future cash flow. Since decisions regarding selling or gifting are difficult to reverse, it is advisable to develop tax-saving strategies that take into account current capital gains and gift taxes, future holding tax burdens, inheritance plans, and the financial capacity of children.

Tax consultant Kim Jong-pil stated, "While some may think that rising home prices will offset taxes, this is not realistically easy. For example, a home currently valued at 1.2 billion won would need to rise to approximately 2.3 billion won for a two-property owner and about 3.6 billion won for a three-property owner to achieve the same level of net profit as under the standard tax rate. This is a level that is realistically difficult to expect, so it is important to comprehensively assess tax burdens under various scenarios rather than simply relying on rising home prices."