Key Points to Consider When Transferring Inherited Property
The taxation on housing transfer income can be as intricate as a labyrinth, leaving even tax experts scratching their heads. It's easy to miss out on tax exemptions by the slightest misstep, leading to the emergence of terms like 'Yangpoja' (those who give up on calculating housing transfer income tax). We've compiled cautionary insights on housing transfer tax with the National Tax Service, focusing on cases where the one-household-one-residence tax exemption didn't apply.
Fundamentally, when selling a house, the housing transfer income tax is calculated by deducting acquisition costs and necessary expenses from the transfer profit, then applying long-term holding special deductions based on the holding and residency period. If a single household holds one residence for over two years before disposal, it's recognized as genuine demand, and no tax is imposed on transfer profits up to 1.2 billion won. For homes acquired in adjusted areas after August 3, 2017, an additional condition of residing for over two years is required to qualify for tax exemptions.
A prominent method to reduce transfer tax is by utilizing long-term holding special deductions. When a single household owner sells a residence they've resided in for over two years, they can receive deductions of up to 80%, depending on the holding and residency periods.
When calculating the holding and residency periods of inherited homes, there's a crucial point to note. Only the period from acquisition until the household member's death is excluded. The holding and residency periods after inheriting the home are eligible for long-term holding special deductions.
For example, let's consider Mr. A, who inherited a 1.5 billion won house from his father due to his passing. The house, acquired by his father in October 2013, was lived in by Mr. A for 6 years and 6 months. In April 2020, Mr. A sold the house for 2 billion won after residing in it for 3 years and 6 months following his father's death. Despite expecting to apply the long-term holding special deduction for the entire 10-year period, Mr. A received notice from the National Tax Service that only the period of his ownership and residence (3 years and 6 months) after inheriting the home was considered. Consequently, the anticipated 80% deduction rate was reduced to 24%, resulting in a tax bill of 36 million won, nine times higher than the estimated tax payment of 4 million won.
There are cases where the one-household-one-residence tax exemption applies even without fulfilling the two-year holding requirement. For instance, when relocating due to job transfers, households that have resided in a home for over a year can qualify for tax exemption when selling their previous residence. It's essential for all household members to relocate together to meet the exemption criteria.
When transferring an office building used for residential purposes, caution is warranted. According to the National Tax Service, Mr. B acquired an office building for 400 million won in February 2018, using it for business purposes until February 2023, and then for residential purposes. In February of the following year, he sold the building for 800 million won. Although Mr. B applied for the one-household-one-residence tax exemption at the time of transfer, since the building was used for residential purposes, the holding period for the tax exemption is calculated from the date it was used as a residence, not the acquisition date. Mr. B did not meet the holding requirement of over two years, thus was not eligible for the one-household-one-residence tax exemption.
A spokesperson from the National Tax Service advised, "In cases of residential usage, it's advisable to prepare evidence such as internal photos and maintenance records to verify the actual usage."
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