[비즈한국] A person in their late 60s, identified as A, owns a single apartment at Apgujeong Hyundai in Gangnam-gu, Seoul. In late January, A finalized an agreement with a buyer to sell the home for approximately 6 billion won between July and August of this year. They received a 200 million won preliminary deposit and agreed to sign the formal contract in early April. A immediately decided to purchase another apartment in Gangnam and paid the 200 million won they received as a preliminary deposit for that unit. However, the buyer recently changed their mind, notifying A: "Let's cancel the deal unless you lower the price by 400 million won. I'll forfeit the 200 million won preliminary deposit."
As the asking price for A's apartment has recently dropped to between 5 billion and 5.9 billion won, the buyer judged that even after forfeiting the 200 million won, they could still purchase a cheaper property. A is now in a difficult position, as they cannot purchase the new apartment without selling their current one. In particular, the 200 million won received as a preliminary deposit must be reported for global income tax; since this would result in over 60 million won in taxes, the collapse of the sale and purchase would leave A with a loss exactly equal to that tax amount. A is currently deep in thought over whether to lower the price by 400 million won or to terminate the contract entirely.
Price drop of over 1 billion won from peak
Person B, who had been trying to sell a large-sized apartment in Seocho-gu, Seoul, has also effectively withdrawn their listing recently. As a single-home owner, B had intended to sell out of concern for surging property taxes, but the market atmosphere has completely changed in just a few months. Although B lowered the asking price by about 400 million won following a real estate agent's advice, the prospective buyers who used to visit almost every week have virtually vanished. B explained, "In the current climate, it feels like I'd have to lower the price even further than the asking price to make a sale. While one or two groups used to visit almost every week, only one group has visited in the last three weeks. Seeing the asking prices for other properties of the same size, most have dropped them by over 500 million won."
With asking prices plunging by more than 500 million won, fears of "contract cancellations" are spreading across Gangnam apartment complexes. Until just a few months ago, it was a seller's market where "the asking price was the law," but with the Lee Jae-myung administration's signal of strengthened property tax policies, listings have surged, turning it into a buyer's market. In particular, as asking prices have fallen by hundreds of millions of won—or up to 1 billion won or more from peak prices in some cases—instances of contract cancellations, or at least fears thereof, are increasing even for homes that have already been contracted.
In apartment transactions, it is common to exchange a preliminary deposit of 100 to 200 million won, and then exchange 10% of the transaction price a week or two later when signing the contract. However, as the trend of price plunges continues, situations where buyers are choosing to "give up the contract" are occurring.
A real estate agent in Seocho-dong hinted, "When prices were skyrocketing, there were cases where sellers would pay back double the 100-200 million won preliminary deposit or the 400-500 million won contract deposit to sell at an even higher price. Now, the roles are reversed, and buyers are considering canceling contracts because they think they can buy cheaper later. Even when I contact prospective buyers who were interested in buying, they take a 'wait-and-see' approach, saying, 'I think I need to watch the market a bit longer.'"
'Preliminary deposits' are taxable even if the contract is canceled
While sellers who receive a forfeited preliminary deposit due to a contract cancellation suddenly gain hundreds of millions of won in income, they cannot simply be happy about it. This is because tax authorities classify forfeited preliminary deposits as "subject to global income tax reporting."
Penalty fees resulting from the cancellation of real estate contracts must be combined with other income for global income tax reporting. A preliminary deposit paid out to purchase another apartment is not recognized as an expense. Since most of the amount is counted as income—even after deducting minor expenses—one has to pay tax in the 30% range. If 100 million won in preliminary deposit is received as a penalty, a tax of over 20 million won is incurred. If the seller is a senior who has retired from their job and converted to a local health insurance subscriber, this can lead to a situation where health insurance premiums skyrocket by over 1 million won per month.
As a result, lawyers and tax accountants have recently been receiving frequent consultations regarding "real estate contract termination." They explain that as contract formats become complex, such as deals involving loans from the seller or requirements for land transaction permits, disputes over "responsibility" are increasing.
A lawyer in Seocho-dong, Seoul, explained, "I have been asked for consultations on liability in real estate contracts several times recently through acquaintances. Since Gangnam apartment contract prices are at least in the multi-billion won range, problems often lead to disputes over liability. Since you can't even hold the other party accountable for damages for simple changes of heart like contract abandonment, it seems it's not easy to 'buy and sell homes well' in such a plummeting market."