New thinking on buying and selling second degree relatives: saving taxes, protecting children, and retaining flexibility

        Lao Zhang worked hard all his life to support his family of three and finally bought a house. Recently, his wife passed away suddenly. In order to provide a safe haven for his children in the future, he signed a second degree purchase and sale contract with his son and sold the house to him at a low price. This not only saved gifts and taxes, but also applied the plan of one-time self use land value-added tax, and completed asset inheritance ahead of schedule. However, when he returned the purchase and sale price he had obtained to his son on an annual basis, his son began to be extremely harsh on him, making Old Zhang doubt whether his plan was wrong. This issue of the 'Finance Column' will explain important matters related to buying and selling second degree relatives, assist everyone in planning asset inheritance, and protect their own rights and interests.

        Four precautions for buying and selling second degree relatives

                1. Source of funds for buying and selling

        According to Article 5 of the Inheritance and Gift Tax Act, "If the movement of property falls under any of the following circumstances, it shall be treated as a gift and subject to gift tax in accordance with the provisions of this Act: the sale and purchase of property between relatives within the second degree of kinship. However, if there is conclusive evidence of the payment of the price, and the payment of the price was not borrowed by the seller or provided a guarantee to others, this restriction shall not apply

        In other words, the sale between two relatives is generally based on gift theory, unless there is evidence of the flow of payment and the payment cannot be lent by the seller to the buyer or provided as collateral for the loan.

        From this, it can be seen that the biggest difference between buying and selling between two relatives and general transactions is that before the parties handle the transfer, they need to declare gift tax to the National Taxation Bureau. After the source of funds is verified, the National Taxation Bureau will issue a non gift consent transfer certificate before they can go to the land administration unit to handle the transfer. However, many people often overlook the evidence of funds when planning a second degree purchase. For example, if the buyer has just entered society, has no income tax declaration record, and the source of self provided funds is unknown, the National Taxation Bureau will not recognize this transaction. Therefore, before handling special transactions such as second degree relatives, in addition to checking the individual's income tax reporting status, it is also necessary to confirm whether the source of funds is legitimate, including: salary transfer, policy termination, fund redemption, sale of stocks, sale of houses and other transactions with financial institution cash flow, in order to avoid being blocked by the National Taxation Bureau in the subsequent process.

        2. The flow of funds from the seller after the sale

        The National Taxation Bureau is well aware that many people who handle second degree transactions are doing so to save taxes, so the flow of funds after the sale is very important. For example, Lao Zhang sold a house to his son for NTD 5 million, and after completing the transaction, immediately returned NTD 2.44 million to Xiao Zhang, which may seem to comply with regulations, but the National Taxation Bureau may still consider it a fake sale and impose gift tax; Alternatively, assuming that Lao Zhang's wife is still alive, after Lao Zhang obtains the purchase price, he gives NTD 2.44 million to his son and wife respectively, and then gives NTD 2.44 million to his son in the name of his wife. Converted, the actual amount paid by his son is only NTD 120000, so there is still a high chance that he will be punished by the National Taxation Bureau as a fake purchase case and receive additional gift tax.

        3. Make good use of the annual NTD 2.44 million gift tax exemption limit

        When operating the buying and selling of second degree relatives, debt relief can also be used effectively to save burden for children. For example, if Lao Zhang sells his house to his son for NTD 100000, he can first use NTD 244000 to waive the debt, so that his son only needs to pay NTD 756000 for the purchase price. If his son applies for a bank loan of NTD 5 million, he only needs to bear NTD 256000 as self provided funds, which can not only reduce the financial burden but also reduce the risk of being recognized by the National Taxation Bureau as a capital return (rebate).

        4. Future selling costs and inheritance tax burden

        In practical operation, people often handle the buying and selling of second degree relatives in a way that is lower than the market price. For example, Lao Zhang's house has a market value of NTD 10 million and an announced present value of NTD 20 million, while his son purchased it for NTD 3 million. Assuming that the son plans to sell the house for NTD 12 million in the future, the profit from the combined property and land tax will be recognized as NTD 9 million (selling NTD 12 million - acquiring NTD 3 million=NTD 9 million), and a high tax burden must be borne.

        Based on the above, although selling real estate to children can complete inheritance planning in advance, relevant tax issues such as land value-added tax, gift tax, income tax (real estate integration tax), and inheritance tax still need to be considered. Although according to the second half of Article 28 of the Land Tax Law, "... land transferred through inheritance, public land sold or lawfully gifted by governments at all levels, and private land donated are exempt from land appreciation tax." However, if inheritance occurs in a short period of time, the parties may not have time to process the sale price, resulting in an increase in inheritance tax. Therefore, when handling inheritance, it is necessary to evaluate multiple aspects to avoid making wrong decisions.

        Make good use of trust and policy planning after buying and selling with second degree relatives

        Returning to this case, Lao Zhang's original intention was to ensure that his children had no worries and alleviate the burden of purchasing a house during the era of high housing prices. Moreover, if his children have the financial ability, they will mostly take good care of and accompany their parents, but sometimes it is not that their children are unwilling, but rather that their financial situation is poor and they are unable to support them. Therefore, parents can make good use of the funds obtained from selling their houses, which can not only guarantee their own life in their later years, but also reduce the burden of taking care of their elders. They can use trust tools to ensure that they still have a large amount of funds when they are unable to take care of themselves in their later years, while reducing the risk of being defrauded or losing investments and losing everything; Alternatively, by properly planning the insurance policy, it can serve as a support and backing for one's later years, and in a hundred years, the policy claims can also be passed down to children.

        Welcome to click on the single episode link, scan the QR code, and listen to the "Ten Delights, No Money in Life" podcast channel S3-EP2 [Second Class Parent Trading]. Listen to more exciting case studies and prepare for your own and your family's future. Also, welcome to make an appointment with the family trust senior tax consultant team for consultation and planning a happy life for yourself.

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