Written By: Lana Choi
In the United States, the state is systematically involved in all economic activities and the accumulation of private property. As a result, paying taxes is equivalent to paying a fee for using this system. This holds true for many processes from gifting or inheriting rental income to profit from sales of private property. In simpler terms, you are paying the state a protection fee for a guarantee that individuals or legal entities can exercise their private property rightly.
The U.S. real estate tax is peculiar in that the tax on gains from real estate investments is measurably lower than tax from other earned or business income. In the process of accumulating sufficient capital for investors to invest, earned income tax or business income tax equals the accumulated capital. This is because it is considered to have paid the tax. Therefore, property taxes and acquisition taxes are set differently by county, but on average they are also lower.
This is also possible because the US considers real estate investment as one of the factors that can revitalize the economy and the country is encouraging real estate investment.
In contrast, Korea refrains from investing in real estate nationally and socially. Because Korea is characterized by high population density and minimal land, investments inflate, and it is easy to speculate. In addition, the social consciousness has a negative impression on real estate investment, tending to view real estate investments as “lazy money” or “unjust profit.” For these reasons, the tax rate of real estate tax is very high.
Acquisition tax
Acquisition tax in the U.S. is very small, about 0.5% of the transaction cost, and is more like a fee concept rather than a tax concept. This is a policy for revitalizing real estate transactions and seems to be to encourage transactions. In contrast, the acquisition tax in Korea is 1~3% at the basic rate alone.
Possession tax
• Korea’s possession tax
Korea’s ownership tax can be divided into two main categories.
1. Property tax: Korea’s property tax is 60% to less than 1% of the publicly announced land price, and the publicly announced land price in Korea is on the rise.
2. Comprehensive real estate tax: Real estate with a value of over 1 billion won is required to pay a comprehensive real estate tax from the time of ownership. The tax is taxed after deducting 600 million won from the total value of the real estate owned by the owner. Comprehensive real estate tax is applied from 1.2% of the total housing price to 6% of the housing price after deduction as a minimum for 2 homeowners but homeowners who own real estate in areas subject to regulation or adjustment, or 3 or more homeowners.
• US holding tax
The U.S. ownership tax can be classified into three categories.
1. Property tax: In the case of property tax, it depends on the criteria set by the local government (federal government> state> county> multiple cities). It is collected twice in April and December and is typically 1 to 1.5% of the value of the property.
2. Mello Ross tax (additional property tax): This tax is levied on newly developed areas in certain areas. It is about 0.3% to 0.7% of the value of the real estate held, which is a tax on the creation of new roads or infrastructure. This tax supplements the local government’s funds to enable local development with through taxes. Therefore, you only pay this tax for a limited time and after this period because you no longer have to pay this tax, the value of the real estate increases.
3. HOA: Home Owner’s Association (HOA) is the cost to manage local shared facilities or shared use areas. It varies from $100 to $1000 depending on the region. This is not a tax in the strict sense but is a cost to the community for joint management of roads, crime prevention, swimming pools, parks, and tennis courts.
Tax on revenue
Taxes on income may include rental income, capital gains tax, inheritance tax, etc. Here, we will only deal with capital gains, and rental income and inheritance tax will be addressed in the next opportunity.
• Capital income tax in Korea (in the case of housing): Capital income tax is also subject to different taxes for owning one and owning multiple homes. The basic tax rate for a one-unit homeowner is around 40% of the gains from transfer. Deductions exist, and in the case of long-term housing or housing for actual residence purposes, tax is only applied on the remaining 20% after deducting up to 80% of the gains on the transfer. If it is not for residence purposes or if it is not for long-term holdings, higher taxes are imposed. In the case of two-unit homeowners, 10% to 20% or more of the basic tax rate is further taxed on 40% of the basic tax rate, and in the case of three-unit homeowners, 20% to 30% or more of the basic tax rate is intensively taxed. In addition, it is considering policies to impose increasingly heavy taxes.
• Capital gains tax in the United States: In the United States, federal income tax is levied by default on income from the sale of real estate, but state income tax is also levied in California and other states. In the case of federal income tax, the tax rate on real estate capital gains is lower than the rates applied to general income, other operating income, business income, and earned income. It varies from state to state, but charges on average between 15% and 20% of capital gains. Unlike Korea, there is no difference between owning one or multiple homes. For individuals, there is also a deduction condition. If you have lived in the house you owned for more than 2 out of 5 years, you are exempted from capital gains up to $250,000 for singles and $500,000 for couples. In addition, preferential provisions related to capital gains tax, such as Article 1031, apply to individuals and corporations in the same way.
What is Article 1031? (Tax Deferral)
In the case of the exchanging similar assets, Article 1031 is a bill that carries over the taxation of the existing capital gains tax to a later date. After selling the property (Investment Property) owned by the owner, if the conditions of Article 1031 (type of period and amount) are satisfied while purchasing a new property of greater value than the sold property, the bill allows the transfer tax to be postponed to a later period. The inheritance tax may be paid at that point instead of paying the tax deferred by the 1031 clause when inheriting the 1031 clause for life.
This bill signifies a philosophy of revitalizing the economy by encouraging investment, judging that the economy can grow by encouraging growing companies to eventually collect more taxes.
Keeping the goose that lays golden eggs is seen as a good policy where not only real estate investment entrepreneurs benefit but also the state benefits. The feedback loop between real estate investment entrepreneurs and the state benefits both parties from the perspective of continuing to obtain gold eggs by feeding the goose better and raising them better rather than killing the golden goose for short term gains.
