Inherited Home Makes Taxpayer a Two-Home Owner—Can Selling the Existing Home Qualify for a Tax Exemption? [Tax Planning Q&A]

Q. After unexpectedly inheriting a home following the sudden death of his parents, A became a two-home owner. He had long owned and lived in only one home under his name and had already planned to sell his current home and move. However, he is concerned about whether he can receive the one-household, one-home capital gains tax exemption when selling his existing home, since inheriting the additional home made him a multiple-home owner. He sought advice on which home should be sold first to reduce his tax burden.
A. According to BDO Korea, even if a taxpayer acquires an additional home through inheritance, the one-household, one-home exemption can apply if the existing home is sold first in accordance with the prescribed order and requirements.
Under the Income Tax Act, a taxpayer must generally own only one home in Korea as of the date of transfer to qualify for the one-household, one-home capital gains tax exemption. However, an exception is available when a person who owned one existing home becomes a two-home owner through inheritance.
If the ordinary home owned at the time the inheritance began is sold first, the inherited home is disregarded when determining whether the taxpayer qualifies as a one-household, one-home owner. If the existing home meets the exemption requirements, including the required ownership and residence periods, the exemption may apply even if the taxpayer became a two-home owner through inheritance. An inherited home also includes a newly built home acquired after inheriting a membership right in a housing association or a housing subscription right and completing the related project.
If several siblings jointly inherit one home left by their parents, it is generally treated as the home of the heir with the largest inheritance share. If two or more heirs have the largest share, the home is first attributed to the heir who lives there. If none of the heirs resides there, it is counted as the home of the oldest heir. Accordingly, an heir with only a minority share is excluded from the number of homes for purposes of the jointly inherited home.
Caution is required if two or more homes are inherited. The special exemption applies not to all inherited homes but only to the "priority inherited home." First priority goes to the home that the decedent owned for the longest period. If the ownership periods are the same, the home with the longest residence period takes priority. If those periods are also the same, the order is determined by the home in which the decedent lived when the inheritance began, followed by the home with the highest officially assessed value.
If a taxpayer who already owns one home inherits two homes, only the one priority home is recognized as an inherited home. The lower-priority inherited home is counted as an ordinary home, making it difficult to qualify for the one-household, one-home capital gains tax exemption even if the existing home is sold.
Jung Seong-kyung, an executive at BDO Korea, said, "If the capital gain on the existing home is substantial and obtaining the exemption is essential, you need to develop a strategy for deciding which home to sell first." She added, "In particular, if the decedent owned multiple homes, it is necessary to seek tax advice starting at the stage of negotiating how the children will divide the inherited assets."
The tax treatment changes if the inherited home is sold first while the existing home is retained. The one-household, one-home capital gains tax exemption does not apply when the inherited home is sold first. However, if it is sold within five years from the date the inheritance began, it is excluded from the number of homes subject to the multiple-home-owner surcharge, and the basic tax rate of 6–45% applies. A long-term holding deduction of up to 30% may also be available.
In this case, the holding period for the inherited home is calculated from the date the inheritance began, not from the date the decedent acquired it. Avoiding the surcharge does not mean that tax on the capital gain is eliminated. If the home is sold more than five years after the inheritance and is located in a regulated area, the higher tax rate for multiple-home owners may apply, and the long-term holding deduction may be denied.
If the inherited home is located in a rural or fishing area, a separate special rule should also be reviewed. An inherited rural home located in a township or village outside the Capital Metropolitan Area is excluded from the number of homes if the decedent lived there for at least five years. However, county areas within metropolitan cities and urban areas are excluded from this rule.
Jung, the executive, advised, "The tax burden on an inherited home can vary significantly depending on the jointly inherited ownership share and the order in which the homes are sold." He added, "An effective way to reduce taxes is to establish a plan for disposing of the homes in the future as soon as the inheritance begins."
[Tax Planning Q&A], based on consultations with tax experts at BDO Korea, is published during the second week of each month.

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