Chang-Jin Kim 

As already mentioned in previous articles,from April 1^st 2018, heavy transfer tax will be imposed tomulti-house owners. The point of such change is to impose transfer income taxwhen transferring a house for those who owns more than 2 houses. 10% ofadditional tax will be imposed to owners who owns 2 houses and 20% ofadditional tax will be imposed to owners who owns 3 houses. Technically, theimposed tax amount is expected to be burdensome, as special deduction for long-termholding is exempted to multi-house owners.

Therefore, for multi-house owners, it isnecessary to consider strategy to save taxes.

First option is to respond government'spolicy positively by registering as rental house.

Second option is to strategically disposeof houses. Disposing the house with the smallest transfer tax can be one way tominimize the tax burden. Gift can be another option to disposal.

Third option is to rebalance thecomposition of the assets by reducing residential real estate and possessingnon-residential real estate.

Below are more detail strategies for eachcase.

[1] Registering as a rental house

For multi-house owners, registering asrental house is the easiest way to avoid transfer taxes. This is a strategy toact positively to the government's policy and possess multi houses at the sametime.

Benefits for registering as a rental houseis as follows;

(1)  Rental house is excluded fromthe number of houses when calculating the transfer tax.

(Requirements)

At the time ofthe lease commencement, market price of the house shall be 600million KRW (cityarea) and 300million KRW (rural area). The lease is required for a minimum 5years. After April, semi-public house is required to be rented for 8 years ormore. However, transfer between rental business licensee is possible, thereforerenting for 5 years and transferring the house to rental business licensee canbe an option.

(2)  Rental house is subjected to specialdeduction for long-term holding

(Requirements)

Long term rentalhouse -> semi-public house (After April)

Main area shallbe less than 85㎡, annual rent increase rateshall be kept below 5%

50% is applied if the rental period is 8years or more

70% is applied if the rental period is 10years or more

(3)  Rental house is not includedwhen calculating the number of the house one generation owns, therefore , ifthere's a rental house other than 1 residential house per generation, thathouse will be exempt from the transfer income tax. Requirement of 2 years ofresidence was added to the new measure.

(Requirements)

At the time of the lease commencement, market priceof the house shall be 600million KRW (city area) and 300million KRW (ruralarea).

Leasing periodof 5 years or more.

(4) Whenimposing tax for Comprehensive Real Estate Holding tax, rental hose is notsubjected to

Taxable housing,

(Requirements)

Rent for 5 years or more, below 600millionKRW (city area) and 300million KRW (rural area)

[2] Strategically disposal

Another way to avoid taxation is to think about how to strategically dispose ofmulti housing. You must think in terms of disposal that you can think of giftsas well as transfers.

If you first consider transferring, inorder to minimize the burden on the multi-housing transfer tax, it is a wiseoption to dispose of house with smallest transfer gap amount first, if you havean option. 

In order to make such a choice, it is necessary to anticipate the transferableincome tax of the house considering the disposal of the assets, and make theoptimized decision. If you consider the gift, as another means of disposal, itcan be useful as a means of eliminating multiple housing. If you have beenthinking about transferring assets to your child, you might be able to choosebestowal as a solution to your multi-housing.

 In this case, it should be noted that, in general,when giving an asset to a child, a contract is conferred on the condition ofdeducting the gift tax on the condition that the liability is borne by theborrowed money or the charter deposit. In that case, deducting the burden ofthe donation assets, the donation tax burden will be reduced. On the otherhand, the burden of the donor is to bear the transfer tax. However, if themulti-housing person chooses to make a burden, the gift tax burden can bereduced but transferred tax of the burden is taxable. If the house was acquiredlong time ago, tax burden can be increased.

[3] Change of Asset portfolio – owningnon-residential real estate

Finally, reduceresidential real estate and retaining non-residential real estate can be asmart option.

It is also a wisechoice to try to retain or invest in non-residential assets, as it isanticipated that there wouldn't be any tax or financial benefit for holding ahouse for a time being.

The recent trendis to invest in a knowledge-based industrial center (apartment-type factory),which cannot be converted into residential house.

 All economic decisions are made according to whateconomic participants are thinking of. In this sense, some people worry aboutchoosing whether to dispose of lease or not, or do not worry about additionalburden as long as one do not dispose of housing, there wouldn't be anytransferred tax. In this case, the burden of the holding tax has to beconsidered.  All economic entities willmake all economic decisions to the extent possible to take into account themagnitude of the burden, and as a result of that choice, will come to achievedifferent results after a certain period of time in the future. We expect eachindividual's wise decision.