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How to Save Gross Real Estate Tax
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2019-12-31
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How to Save Gross Real Estate Tax

Date: December 27,2019


I. Introduction

With heavier taxation system on capital gains of multiple house owners in 2017 the government has introduced another tougher taxation system for owners of multiple real estate properties in 2019. Many multiple home owners have seen huge tax bill rise in recent days. As the government has announced it is increasing the tax burden on multi home owners by rationalizing the cost of real estate ownership. To be sure, citizens are required to comply with the government’s tax policies but also at the same time they have rights to find legitimate ways to alleviate their tax burden.Therefore, this paper will look into what the gross real estate tax is and how to save it.

 

II. What is Gross Real Estate Tax?

The amount of gross real estate tax is determined by summing up each amount of comprehensive real estate holding tax levied,respectively, on housing, bare ground and appurtenant land including retail building.

1) The amount of the tax levied on housing is aggregated by household. Where a house’s publicly notified price exceeds KRW 600 million the excess is the subject to the gross real estate tax. For single house owners the price is KRW 900 million and for couples who jointly own a house the price is KRW 1.2 billion.

2) The amount of the tax levied on bare ground is aggregated by individuals. Where bare ground value exceeds KRW 500 million the excess is the subject to the gross real estate tax.

3) The amount of the tax levied on retail buildings and appurtenant land is aggregated by individuals. Where the amount of their publicly notified price exceeds KRW 8 billion the excess is the subject to the gross real estate tax.

 

III. Changes to Gross Real Estate Tax

1. Rationalizationof Tax Base

The Korean government has made efforts to rationalize publicly notified individual land price. The taxable portion which currently stands at 80 percent will go up by 5 percent every year, reaching 85 percent this year and 100 percent by 2020. It means that with the same tax rate the amount of tax bills are bound to rise.

 

2. HeavierTaxation on Multi-house Owners

The government will apply higher tax rates to the houses of three house owners and two house owners in overheated areas. The gross real estate tax rate on single house owners valued less than KRW 300million is 0.5% and the rate for the house valued at KRW 9.4 billion is 2.7%.However, the rate for multi-house owners goes up to 0.6% and 3.2% respectively.

 

3. Applicationof different upper limit of tax burden

The gross real estate tax is levied based on the government-assessed house value or publicly notified price of land. Drastic increase in these values could lead to heavier tax burdens. To prevent it from happening the current regulation limits property tax growth to 150 percent of the previous year. The tax growth limit of 150 percent is for those who hold a house or two. However the limit is 300 percent for three house owners and 200 percent for two house owners in overheated areas.

 

IV. How to Save the Gross Real Estate Tax?

1. Registeras long-term rental housing

The gross real estate tax reform has made multiple home owners bear heavier tax burden. Two house owners in overheated areas and three house owners are the subject to the higher tax rates and tax growth limit compared to the previous year is 200 percent and 300 percent,respectively making them see hugely increased tax bills. Selling assets could be a way to get away with the tax burdens but sellers have to shoulder heavy capital gain taxes in this case. One of the alternatives that could be considered for those who own houses for rental business is to register the houses as long-term rental housing. This is already commonly used method to avoid heavy capital gain taxes. To register as long-term rental housing the house in over-heated area should not exceed KRW 600 million and KRW 300 million in other areas. The owner of the house has to register one’s house as 8-year-long term rental housing and register oneself as a rental business operator at the tax office having jurisdiction over the house over the place for tax payment.After going through the above procedures the owner should apply for the exclusion of summing up taxation. Rental houses which meet the requirements would be exempt from the tax base. However the houses acquired later than Sept 14,2018 are not the subject to the exemption.

 

2. Giving real estate property to a child with separate household

Tougher capital gains tax makes it difficult for multi house owners to sell their houses due to worries about the tax bills they would face. As I mentioned above registering houses as long term rental housing could be a way to relieve tax burdens. However for those who are not available any of them giving a house to one’s child who maintains separate household could help them to save gross real estate taxes. However even if the child does not have separate household yet it is still considerable to give a house to children. Currently paying a gift tax could be burdensome however,considering growing tax amount caused by increased publicly notified house prices and capital gain taxes it could help tax payers’ financial burden.

 

3. Constructingbuildings on bare ground

Bare ground with the officially assessed individual land price higher than KRW 500 million is subject to the gross realestate tax and it could mean holding bare ground increases the risk of heavier tax bills including capital gains tax. Therefore constructing buildings on land is recommended to save gross real estate tax.

 

4. The date of taxation for gross real-estate tax is June 1st every year

Like property tax gross real estate tax is levied on June 1st every year. Where a person who acquires real estate property settles the balance and finishes the registration of real estate transfer before June 1st he or she is the owner of the property and is liable for property tax and gross real estate tax. Therefore if it is planned to acquire and sell property around June 1st, considering when to pay the settlement and to register the transfer of ownership could affect the tax amount you have to pay.

 

5. Payingattention to government-assessed house value and publicly notified land price

The rate of increase of the government-assessed house value and publicly notified land price released by the Ministry of Construction and Transportation in the first half of every year hugely affects the financial burden on tax payers. The government-assessed house value is released on April 30th every year and there is a period for gathering and hearing opinions for 20 days from the public from a month earlier. In May,those who have different view on the value can file an objection. The publicly notified land price is released on May 30th every year and those who want to raise an objection can oppose it in June. Therefore, checking the two values and prices and raising objections to unreasonable value could be a good way to keep taxes affordable.

 

From the current trend, taxes on property and real estate property will growing higher. The government is strengthening tax rules increasing the financial burden on multi home owners. Therefore,multi-home owners should keep alert for this trend. From the perspective of fund management retaining multi homes could be ok if the price hikes in homes overtake that of property taxes and capital gains tax however if the case is the opposite, selling property or giving it to one’s child could be a good wayto save taxes.

 

 

 

How toCalculate Gross Real Estate Tax?

[1] The Computation of Gross Real Estate Tax

         

Publicly notified house & land price

×

(1-deduction rate of property tax)

=

Publicly notified house and land price after deduction

         

Publicly notified house and land price after deduction

-

Tax credit

=

Publicly notified house and land price after deduction

KRW 600 million for house

KRW 500 million for general aggregate tax

KRW 8 billion for separate aggregate tax

         

Publicly notified house and land price after deduction

×

85%~100%(ratio of fair trade market price)

=

Tax base for gross real estate tax

 

 

[2] Computation of tax amount of grossreal estate tax

         

Tax base of gross real estate tax

×

Tax Rate

=

Tax amount of gross real estate tax before progressive tax credit

housing 0.5~2.7%

(0.6%~3.2%)

General aggregate taxation 0.1~0.3%

Special aggregate taxation 0.5~0.7%

         

Gross real estate tax amount before progressive tax credit

×

Progressive tax credit

=

Tax amount of gross real estate tax

Taxed at progressive rates

         
                     

Tax amount of gross real estate tax

-

Deductible property tax amount

=

Calculated tax amount

             

Calculated tax amount

-

Tax deduction for single home owners

-

The excessive amount of tax growth limit

=

Tax liability

                     

 

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