Real Estate Exchange Between Parents and Children: Gift Tax Varies Depending on the Difference Settlement Method

Due to the impact of real estate tax reform plans, inquiries regarding the "exchange" method of transferring assets by swapping real estate between parents and children are increasing. In particular, demand for timing asset transfers is leading to exchange transactions due to changes in the special deduction for long-term holding.

Reduction of Special Deduction for Long-term Holding and the Rise of Exchange Transactions

According to recent tax reform plans, the special deduction system for long-term holding for single-household, single-home owners will change. Currently, a maximum of 80% is deducted by combining the holding period and the residence period, but from 2028, it will transition to a residence-centered deduction. In 2028, it will decrease to 6% per year for residence and 2% per year for holding, and from 2029, only 8% per year for residence will remain, while the holding deduction will be abolished. Additionally, new limits per person and per item will be established for the special deduction for long-term holding, which previously had no limit, being restricted to 2 billion won in 2028 and 1 billion won from 2029.

Due to the reduction of these deduction benefits, a need is arising to realize capital gains and increase the acquisition value at a time when sufficient deductions can be applied. Accordingly, interest is rising not only in exchanges between strangers but also in exchange transactions between related parties to transfer assets from parents to children.

Legal Nature of Exchange Transactions and Tax Calculation Principles

Real estate exchange is a legal transaction method stipulated in the Civil Act. Under the Income Tax Act, an exchange is defined as a transfer of assets for consideration, so even if real estate is exchanged instead of money, both sides incur capital gains tax and acquisition tax. In the case of transactions between family members, a general sale may be presumed to be a gift, but an exchange is considered a transfer because the exchange of property is clear.

Exchange methods are broadly divided into two types. There is "simple exchange," where properties are swapped without settling the difference in market value, and "actual transaction value exchange," where the market value is determined through appraisal and the difference is settled. In practice, it is recommended to determine the market value through appraisal and specify the difference settlement method in the contract to reduce risks. Especially in family exchanges, it is possible to design a plan to optimize gift tax and acquisition tax by appraising the parents' real estate at a low value and the children's real estate at a high value to reduce the market value difference, and then settling the difference.

Gift Tax and Acquisition Tax Burdens Arising from Failure to Settle the Difference

If the settlement of the capital gain difference is not perfectly executed during an exchange, the tax burden may increase. If the difference settlement is not performed while there is a difference in market value, gift tax may occur as the low-value transfer regulations are applied. For example, if a 1.2 billion won asset is given and a 1.7 billion won asset is received, gift tax is imposed on the remaining amount after excluding "the smaller of 30% of the market value of the given house and 300 million won" from the 500 million won difference.

Caution is also required regarding acquisition tax. According to the Enforcement Decree of the Local Tax Act, the acquisition tax base is determined by the larger of "the sum of the recognized market value of the house being received and the recognized market value of the house being given plus the cash payment, minus the amount received." In other words, the larger the price difference between the two houses and the less the difference is settled, the higher the acquisition tax the receiving party will bear based on the more expensive house. While exchanges have the advantage of being excluded from the preparation of fund procurement plans or intensive investigations of actual transaction prices, factors such as the possibility that the child's house could be attributed to the parents' inherited property must be considered.