[Edaily Reporter Choi Jeong-hee ] Last June, Mr. Kim received an unexpected tax bill. It stated that he owed an additional 100 million won in capital gains tax on an apartment he had sold four years earlier.

Mr. Kim had neither purchased this apartment for investment purposes nor held it to profit from a price appreciation. It was an apartment he had received in lieu of money he was owed by an elementary school classmate. He had owned it for a mere three months before selling it, so he was understandably baffled when the National Tax Service demanded he pay 100 million won in capital gains tax.

Mr. Kim eventually filed an appeal with the Tax Tribunal last December. Did Mr. Kim win his battle against the National Tax Service?

An elementary school classmate’s promise: “I’ll pay you back with an apartment”

From 2016 to 2019, Mr. Kim lent money to his elementary school classmate, Mr. Lee, on several occasions. Mr. Lee, who was running a business, asked to borrow money, and Mr. Kim couldn’t bring himself to refuse. He received some of the money back, but the rest remained unpaid. Then, he heard that Mr. Lee’s business was facing difficulties.

Growing anxious, Mr. Kim obtained a promissory note promising repayment by June 2020. However, even after the promised date passed, the money never arrived. When Mr. Kim threatened to “press charges,” Mr. Lee offered an alternative.

“I have an apartment I purchased in 2018—I’ll give it to you.”

Mr. Kim breathed a sigh of relief. However, not long after, Mr. Lee transferred ownership of the apartment to his sister-in-law’s name. Mr. Kim had trusted Mr. Lee so much that he had lent him the money without even drawing up a promissory note—only hastily drafting one later—so he felt deeply betrayed.

Mr. Kim established a mortgage on a piece of land in Eumseong County, North Chungcheong Province, that Mr. Lee owned. Only then did Mr. Lee transfer the apartment to Mr. Kim in July 2021. Since the apartment was registered under his sister-in-law’s name but Mr. Lee was the actual owner, there were no issues with the transfer of ownership.

However, there was another problem with this apartment.

The apartment’s price was 377 million won, and Mr. Kim had to shoulder 147 million won in outstanding installments. Mr. Lee had failed to pay 147 million won when he purchased the unit. As a result, the actual economic value of the apartment Mr. Kim ended up with was approximately 230 million won. Mr. Kim reported that he acquired the apartment for 230 million won.

Three months later,

he sold

it… and faced a tax bomb

Mr. Kim sold the apartment to Mr. Park in October 2021, just

three months

after taking possession. The sale price was approximately 400 million won (the market price at the time). Mr. Park also paid off the entire remaining installment balance of 147 million won on the apartment.

Mr. Kim sold the apartment after just three months in order to quickly liquidate the money he had lent to Mr. Lee. Because he disposed of the property within such a short period, the capital gains tax rate was high. According to the Income Tax Act, a capital gains tax rate of as high as 70% applies when a residence, a housing cooperative membership right, or a pre-sale right is sold after being held for less than one year. However, since the holding period was a mere three months and the capital gain on a provincial apartment could be considered negligible, Mr. Kim had no concerns about capital gains tax when he sold the apartment.

The problem arose afterward. Jincheon County determined that Mr. Park had acquired an apartment worth approximately 400 million won—including the outstanding installment payments—and reassessed the acquisition tax for 2023. Like Mr. Kim, Mr. Park had 147 million won remaining in installment payments, so he had reported only the remaining amount (approximately 250 million won) as the acquisition value. Upon receiving the notice from Jincheon County to pay the acquisition tax again, Mr. Park accepted it and paid the tax. This information was also relayed to the National Tax Service.

At this point, the National Tax Service took another look at the past capital gains tax returns filed by Mr. Kim, who had sold the apartment.

From the National Tax Service’s perspective, the acquisition value Mr. Kim had reported was 230 million won, yet the amount he sold the apartment to Mr. Park for was approximately 400 million won.

According to the National Tax Service’s calculations, this meant Mr. Kim had realized a capital gain of over 150 million won.

The National Tax Service notified Mr. Kim that he had to “pay an additional 100 million won in capital gains tax.”

Mr. Kim felt this was unfair. When he acquired the apartment, he had taken on 147 million won in unpaid installment payments, which were included in the sale price—so he ended up selling an apartment worth about 400 million won—yet the acquisition price was a mere 230 million won...

The National Tax Service included the installment payments in the sale price but excluded them when calculating the acquisition price.

The National Tax Service pointed out, “There is insufficient objective evidence to prove that you lent money to Mr. Lee and received the apartment in lieu of repayment.”

Crucial Evidence from an Unexpected Source

It was a frustrating situation for Mr. Kim. However, for some reason, the Tax Tribunal ruled in Mr. Kim’s favor.

Fortunately for Mr. Kim, there was one lingering matter from the past. The prior mortgage registered on Mr. Lee’s land in Eungseong County became the “smoking gun” that cleared Mr. Kim’s name.

When this land was sold at auction, Mr. Kim had previously received a distribution from the proceeds. However, the Korea Credit Guarantee Fund (KCG) raised an objection. After Mr. Lee failed to repay his bank loan, the KCG, which had paid off the debt on his behalf, filed a lawsuit claiming that it was also a creditor and that the establishment of the mortgage was invalid. The KCG’s main argument was that since many people had been defrauded by Mr. Lee, why should Mr. Kim alone receive the auction proceeds from the land?

KOGIC won the lawsuit, and Mr. Kim was required to return the auction proceeds he had received.

This case actually worked in Mr. Kim’s favor this time, as it served as objective evidence supporting the fact that he had indeed lent money to Mr. Lee.

The Tax Tribunal revoked the National Tax Service’s capital gains tax assessment (Tax Tribunal Case No. 2026In0914). The Board reasoned that if the outstanding installment payments of 147 million won were included in the apartment’s sale price, they must also be included in the acquisition cost. The Tax Tribunal also cited a Supreme Court precedent (Supreme Court 2020Du27592) stating that the actual transaction price is the actual consideration objectively verified through a contract or other supporting evidence.

Had these facts not been proven, Mr. Kim would have been treated as having purchased the apartment from Mr. Lee for half the market value (230 million won) instead of the actual market price (approximately 400 million won), and he would have been required to pay gift tax as well.

The financial transaction he began trusting his friend backfired as a 100 million won tax bomb, but what ultimately saved Mr. Kim were a promissory note and a mortgage he had left behind long ago, along with the court records.

※ This article reconstructs the sequence of events based on a decision by the Tax Tribunal. Since the real names of the individuals involved and some specific amounts were not disclosed in the original decision, the content is based solely on verified facts. No details not included in the decision have been arbitrarily inferred.