Detached, Tenement Houses Taxed by Market Prices

Starting next year, housing other than apartments, such as detached, multifamily, and tenement dwellings, will be subject to a “Publicly Announced Housing Market Price System” like apartments and will need to rate a standard market price.

The standard market prices of units such as detached housing are to be decided at 70 percent of the actual transaction price, and this will increase the standard of assessment (the standard for imposing taxes) for property tax to two times the current 30 percent of the actual transaction price.

Also, this will be used to verify “double contracts,” which are contracts written with a price much smaller than the actual contracted price.

On October 10, the Ministries of Construction and Transport (MCT) and the Ministry of Finance and Economy announced their decision to implement the ‘Publicly Announced Housing Market Price System’ in step with the composite real estate tax to be executed next year. They have started work on it with the Korea Appraisal Board.

“Publicly Announced Housing Market Price System” requires all housing including apartments, multi-generation and multifamily housing, and tenement houses to appraise a market price and publicize it on related organization homepages, such as city hall, county offices, and district offices. Currently, nationwide, about 6 million residences, all apartments, have publicized their market price at 70 percent to 90 percent of the actual transaction price, and the rest have no appraised market price.

Park Sang-woo, housing policy manager of MCT, said “The standard market price of detached houses and tenement houses will be appointed at 70 percent of the actual transaction price” and that, “This will be used as the standard of imposing possession tax and also to verify that the real estate transaction was enacted at the actual transaction price.”

The land of detached and tenement houses uses publicized market prices as the standard of assessment and buildings use the standard of assessment of local taxes as standards for property tax, transfer income tax, acquisition and registration tax. The standard for assessment is at this time 30 percent to 50 percent of the market price.

For example, for a detached house bought at 100 million won (contract and tax payment standard), and sold at 200 million won (market price) the transfer marginal profit is 100 million won. Until now you could write a contract with 100 million won, 50 percent of the actual transaction price, and avoid payment of transfer income tax. However if the standard market price is decided at 140 million won, 70 percent of the actual transaction price, there will be transfer income tax for the transfer marginal profit of 40 million won.

Lee Gyu-won, a Korean Institute of Certified Public Accountant, said, “The value of buildings has been underestimated for high-class tenement houses (villas) and detached houses with recently increased estate prices, and the burden of transfer income tax, acquisition and registration tax will grow heavier.”

Kwang-Hyun Kim Eun-Woo Lee kkh@donga.com libra@donga.com