When filing your comprehensive income tax return, you'll often receive advice on how to reduce income and gift taxes on rental income. Consulting on tax-saving strategies reveals several basic and detailed approaches to tax reduction. Let's introduce three such methods.
1. Inheritance tax savings through advance donations
Inheritance tax is levied on the entire estate inherited upon death, and the rate is relatively high. Therefore, it's effective to reduce the amount of inheritance by gifting assets before the inheritance begins. Gift tax is levied based on the recipient, making it more manageable than inheritance tax and easier to prepare for.
Timing the gift is crucial for pre-gifts. For property gifted to heirs (spouse, direct descendants, etc.), gifts made within 10 years prior to the commencement of inheritance are included in the inheritance. For property gifted to non-heirs (son-in-law, daughter-in-law, grandchildren, etc.), gifts made within 5 years prior to the commencement of inheritance are included in the inheritance. Therefore, by carefully selecting the gift recipient, inheritance tax can be reduced.
The valuation of gifted property is also important. There are two methods for evaluating real estate when donating: standard market value and appraisal. Standard market value is generally assessed at a lower price than market value, which can be advantageous for lowering gift taxes. However, recent changes to tax laws have allowed for tax savings on expensive buildings and other assets through appraisal.
2. Tax savings through corporate conversion
Rental income tax has a progressive tax rate structure, with the rate increasing as income increases. Therefore, converting to a corporation allows you to enjoy both income tax savings and inheritance tax savings.
Incorporation is a method of operating a rental business by transferring a building from an individual's name to a corporation's name. Incorporation can result in a lower corporate tax rate than the individual income tax rate, and it can also allow for income diversification by appointing a spouse or other person as a corporate representative or executive and paying their salary.
3. Tax-saving methods for utilizing family corporations through rental deposits or debt utilization
When calculating inheritance tax, the rental deposit is recognized as a debt of the deceased and can be deducted from the value of the inherited property.
Leasing a building on a jeonse (a deposit) basis is more advantageous than renting monthly. When leasing a building, renting on a jeonse (a deposit) basis can be advantageous for inheritance tax savings. This is because the jeonse deposit is deductible as a debt of the deceased as of the date of inheritance. This additional cash flow can be used to sell a portion of the building in advance through a low-price sale through a family corporation. Since family corporations allow each shareholder to borrow up to KRW 2 billion without interest, this is a useful tax-saving measure when the building's value is low.
For over 20 years, I have filed over 2,000 reports regarding inheritance, gift, and transfer income tax for wealthy individuals through land compensation (e.g., Magok District, Hanam New Town, Yongin Regional Corporation). I am the principal tax accountant at Gahyun Tax Law Firm, dedicated to exploring the best tax-saving methods in the face of ever-changing tax laws. Through the "Julyse" YouTube channel, I share tax-saving tips for wealthy individuals on how to reduce their inheritance and gift income tax.
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