[PB Notebook] Land Compensation Is Determined Not When You Receive It, But When You Prepare for It

Taeil Jeong, Team Leader of the Private Banking Team at KB Gold&Wise the FIRST Dogok Center

Jung Gukmin (age 47) is an ordinary office worker who owns land inherited from his father. Since capital gains tax is not incurred unless the land is directly transferred, he did not pay much attention to taxes. However, recently, there were rumors that the land would be subject to expropriation, and one day he actually received a notice of expropriation, which left him deeply concerned. Most landowners are unfamiliar with the land compensation process, as it is something they might experience only once in their lifetime. This is because it is a special case of transfer, not a typical one. The important point is that land compensation is also recognized as a transfer, which means there is an obligation to report and pay taxes accordingly. In practice, the more you know, the more compensation you can receive, and the better you prepare, the more you can reduce your tax burden.

Before Receiving Compensation (Negotiation vs. Proceeding to Expropriation or Litigation)

When landowners are notified of the compensation amount, they must quickly decide whether to engage in negotiations or pursue an objection process. To do this, they should first request information disclosure to obtain the appraisal report. Then, by consulting with an appraiser and an attorney, they should carefully examine the possibility of increasing the compensation amount at the expropriation decision, objection decision, or litigation stages. If there is no urgent need for funds, there is no need to rush into negotiations. This is because, after about six months, one can proceed with objections and still receive the deposited compensation from the court. In addition to direct compensation for the land, it is also essential to check for indirect compensation items. For example, those eligible for "negotiated land transfer" may be able to receive the right to purchase a new apartment in the land compensation area.

From a tax perspective, it is essential to calculate the exact tax liability before expropriation with the help of a tax specialist experienced in compensation cases. If you own multiple parcels, you can employ tax-saving strategies by staggering the timing of transfers to adjust exemption limits and progressive deductions. Furthermore, if you are planning to make a gift after receiving the compensation, you can reduce the overall tax burden, including capital gains tax and gift tax, by planning the gift before receiving the compensation.

Stage of Receiving Compensation

Receiving compensation during the negotiation stage

Legally, negotiated compensation is considered a "voluntary acquisition." Therefore, it is advantageous to receive the negotiated compensation quickly to reduce interest expenses by repaying debts or to use the funds for investment to generate additional income.

Receiving compensation during the expropriation decision stage

Legally, compensation through an expropriation decision is considered a "forced acquisition." Once the expropriation decision is finalized, ownership is forcibly transferred regardless of whether the compensation has been paid. Even if you are not satisfied with the compensation amount, it is beneficial to clearly indicate your intention to "reserve objections" on the application for withdrawal of the deposited compensation and to receive the compensation as soon as possible. This is because the interest rate on court deposits (repayment deposit rate of 0.35%) is often lower than the rates offered by financial institutions.

Post-Compensation Management

If you receive compensation in the form of bonds, these are generally traded between securities firms either on or off the exchange, making them difficult for individuals to access. Moreover, land compensation bonds are not ordinary bonds and are classified as small-denomination bonds by financial institutions, making them even less accessible. It is also difficult to check real-time prices as you would with stocks. Additionally, even for the same bond, prices can vary significantly depending on the date and time of sale. Therefore, it is advisable to choose a financial institution that shares all information transparently and minimizes fees from the customer's perspective.

Land compensation is the process of converting real estate, which has been held for a long time, into movable assets (cash). While real estate is a fixed asset, movable assets can be redistributed in various ways such as family gifts, settlement of bonds and debts, or inheritance. After receiving the compensation, it is important to consult with an asset management expert to maximize returns by utilizing products that suit your situation, such as tax-free products, fixed-rate products, or investment products.

Whether you can increase the compensation amount through an objection process depends on the usage status of the land and the circumstances of its acquisition. In general, objections result in an increase equivalent to the change rate of the officially announced land price. However, if the appraisal direction for the land differs from its actual usage, there is a possibility of a greater increase. For instance, if the land is classified as a forest on paper but is actually used as farmland, or if it is appraised as a road but is actually farmland, these are typical examples.

Land compensation is a special form of transfer, different from ordinary transfers. Moreover, each individual's situation is different, and the applicable tax-saving methods also vary. Since the amount of compensation is usually large and cannot be reversed once decided, initial response is crucial. Therefore, the wisest approach is to seek assistance from a specialized compensation team with extensive experience, consisting of appraisal, legal, tax, real estate, and financial experts.

From an expert's perspective, the most regrettable cases are when people seek advice only after they have already received compensation. Although compensation and taxes are administered within the legal framework, there are clear strategies for increasing compensation and reducing taxes. Those who are prepared can receive more compensation and pay less tax, while those who are not will only remember the reduced compensation after paying taxes. If your land compensation schedule is approaching, now is the golden time to review your plans.

Taeil Jeong, Team Leader of the Private Banking Team at KB Gold&Wise the FIRST Dogok Center (Tax Accountant and Licensed Real Estate Agent)

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