The Basic Taxes Involved in a Sale of Real Estate Property

The Taxes Involved in a Sale of Real Estate Property

Posted by: Joanne Almaden in Real Estate Financing, Real Estate Laws On:September 20, 2015 Last updated: April 1, 2018

It has been said that one can only be sure about two things in this life – death and taxes. But we’re gonna have to talk about first one some other time. In this post, we’ll be talking about taxes. More specifically, the taxes involved in a sale of real estate property.

The usual arrangement on which party pays what taxes, in a sale transaction is as follows:

Seller’s Responsibility:
1. Income tax, if the property to be sold is an ordinary asset
2. Value-added tax/Percentage tax, if the property to be sold is an ordinary asset
3. Creditable Withholding Tax, for real properties sold by habitually engaged real estate sellers
4. Capital Gains Tax, if the property to be sold is a capital asset
5. Documentary Stamp Tax
Buyer’s Responsibility:
1. Transfer Tax
2. Registration Fee

Now let’s define these things…

Warning:
What follows may get a little too technical for most people but there’s just no better way to explain and describe these things accurately. So just bear with us. 🙂

Income Tax

The proceeds from the sale of real properties held primarily for sale to customers in the ordinary course of trade or business or sale of real properties classified as ordinary assets of the seller who is not habitually engaged in real estate business, shall be included in the seller’s global income. This forms part of the seller’s other income subject to 30% regular income tax or 2% minimum corporate income tax if the seller is a corporation or a graduated tax rate at a maximum rate of 32% if the seller is an individual.

Ordinary assets are assets which qualify in any of the following types of property:

included in the stock of trade or inventory of the taxpayer in a normal business operation at the close of the taxable year.
real estate properties primarily sold to customers by the taxpayer in normal course of business
real estate properties used in business which are subject to the allowance for depreciation
real estate properties which are used for normal course of business by the tax payer

Value-added tax (VAT)

There shall be imposed a 12% value-added tax (VAT) on real estate sales of those who are engaged in the business of selling, developing, leasing or sub-leasing of real property and those licensed to engage in real estate brokerage business based on their commission. However, in pursuance to RR No. 4-07, even if the real property is not primarily held for sale to customers or held for lease in the ordinary course of trade or business but the same is used in the trade or business of the seller, the sale thereof shall be subject to VAT being a transaction incidental to the taxpayer’s main business.

In determining the transactions subject to VAT, the following threshold must be considered:

Type of Property Sold	VAT-exempt
Residential Vacant lot	₱1,919,500 and below
Residential House & lot	₱3,199,200 and below
Residential Condominium unit	₱3,199,200 and below
Commercial properties are subject to VAT

Please note that real estate sales that are exempt from VAT based on the above threshold shall be subject to 3% percentage tax. However, if the seller is a VAT-registered person, the sale of his ordinary asset shall be subject to VAT even if the sales made are within the prescribed threshold.

Further, a person should register as a VAT entity if his gross annual sales and/or receipts exceed ₱1,919,500.00 in a year.

The tax base of 12% output VAT is the highest among the (1)selling price, (2)Bureau of Internal Revenue (BIR) zonal value, and (3)assessed value by the provincial/city assessor and the time of payment will depend whether the sale is an installment sale or a cash sale.

Capital Gains Tax

Capital gains presumed to be realized from the sale of a real property not categorized as ordinary asset is subject to a tax of six percent (6%) based on the highest among the (1)selling price, (2)Bureau of Internal Revenue (BIR) zonal value, and (3)assessed value by the provincial/city assessor.

Conditionally exempt from paying Capital Gains Tax:

The sale of a principal residence is exempt from capital gains tax. The said principal residence pertains to the seller’s family home or the dwelling house, including the land on which it is situated, where the husband and wife or an unmarried individual, whether or not qualified as head of family, and members of his family reside. In order for the sale to be qualified as exempt, the following conditions should be met:

The entire proceeds from the sale of the principal residence should be fully utilized in acquiring or constructing a new principal residence within 18 calendar months.
This exemption can only be exercised once every 10 years
The BIR commissioner should be duly notified through a prescribed return 30 days from the date of sale or disposition of the tax payer’s intention to avail of the tax exemption.
If the proceeds from the sale have not been fully utilized, the portion of the gain from the sale is subject to 6% capital gains tax.
The buyer of the principal residence should withhold from the seller of the principal residence the supposed 6% capital gains tax. This amount should be placed in an escrow agreement between the concerned Revenue District Office and the seller.

For the last condition above, the 6% equivalent amount shall only be released once all the preceding conditions are met. The escrow agency shall require the seller of the principal residence a certification before it can release the amount to the seller of the principal residence.

Further, the following are also exempted from paying capital gains tax:

Dealer in securities, regularly engaged in the buying and selling of securities
An entity exempt from the payment of income tax under existing investment incentives and other special laws
An individual or non-individual exchanging real property solely for shares of stocks resulting in corporate control
A government entity or government-owned or controlled corporation selling real property
If the disposition of the real property is gratuitous in nature
Where the disposition is pursuant to the CARP law

– from BIR

Documentary Stamp Tax

The documentary stamp tax is an excise tax levied on documents, instruments, loan agreements and papers evidencing the acceptance, assignment, sale or transfer of an obligation, rights, or property incident thereto.

The amount of tax is either fixed or based on the par or face value of the document or instrument. In the case of the sale of real estate properties, the rate shall be 1.5% based on the highest among the (1)selling price, (2)Bureau of Internal Revenue (BIR) zonal value, and (3)assessed value by the provincial/city assessor.

Transfer Tax

Transfer tax is the tax imposed on any mode of conveying the ownership of a real property, either through sale, donation, barter, or any other mode. The tax rate varies depending on the location of the real property as presented below:

If the property is located in the province, tax must not exceed 50% of the 1% of the tax base stated above.
If the property is located in Metro Manila or any cities in the Philippines, tax must not exceed 75% of the 1% of the tax base state above.
Penalty of the failure to pay is 25% of the amount due plus interest of 2% per month, not to exceed 72%.

Further, the tax is based on the highest among the property’s (1)selling price, (2)Bureau of Internal Revenue (BIR) zonal value, and (3)assessed value by the provincial/city assessor.

Creditable Withholding Tax

Creditable withholding tax (CWT) is the tax which is withheld by the buyer/withholding agent from his payment to real estate dealers, developers, operators and persons or entities who are considered to be habitually engaged in real estate business, and which tax is creditable against the income tax payable of the seller.

Thus, when the real estate sold is a capital asset to the seller, no creditable withholding tax shall be imposed and his income from the sale of real estate will be subject to capital gains tax.

Under the tax rules, the following are the percentages to be withheld:

Seller	Tax rate	Threshold
The seller/transferor is habitually engaged in the real estate business as per proof of registration with the HLURB or the HUDCC or other satisfactory evidence (for example, he/it consummated during the preceding year at least six taxable real estate transactions, regardless of amount)	1.5%	₱500,000 and below
	3.0%	Over ₱500,000 but not more than ₱2,000,000
	5.0%	Over ₱2,000,000
The seller/transferor is not habitually engaged in the real estate business (but the real estate sold is an ordinary asset)	6.0%	Any amount
The seller/transferor is exempt from creditable withholding tax in accordance with Section 2.57.5 of Revenue Regulations No. 2-98	Exempt	Not applicable

In summary:

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Here at PPE, we take good care of our clients every step of the way – from the start of the transaction, to long afterwards. This includes empowering them with proper information about their rights, responsibilities and more importantly, how they can get the best deals on the property they want.

If you are looking for professional and reliable real estate services in the Philippines, contact us today and be assured of competent work and client support that will save you tons of headaches along the way.

With contributions from Ms. Jane E. Medina, CPA, REA, REB

ABOUT THE AUTHOR

Joanne Almaden

Joanne is a licensed real estate broker and appraiser. She founded Phil. Property Expert, Inc. – a top-notch real estate services company whose vision is being the most trusted company when it comes to competence and quality of service.

Lyrehs Biangco

Hi Joanne,

I just want ask, if let say I am a foreign agency and tie up with local developer in Philippines and we sold a few units in Philippines, does our commission as foreign agency subject to 12% VAT deduction?
- Peter Jones (TigerWorks)
Peter Jones (TigerWorks)

Hi Joanne, I have an easy one for you…
I am an ordinary person, purchasing a small condo in metro manila, directly from the owner for the sum of 2,000,000 PHP *(or 1,999,000 if need be) and neither of us is engaged in the the buying / selling real estate business.
Can you please give me the breakdown of how many additional PHP I need to pay and to whom ?
(ie, transfer, vat, etc)
I’ll bookmark this page in wait for your response, however if it helps, my email is [email protected]
Cheers..
- Nimrod Flores
  
  Hi Peter, thanks for dropping by. For personalized assistance, you may avail of our Title transfer services. You can check out the details [ here ].
  - Peter Jones (TigerWorks)
    
    Thanks
    
    You’ve been typically helpful
    
    Cheers
Teddy

Hello! I bought a vacant lot from a developer.
what tax should be paid to BIR? is it Capital Gain Tax or is it Creditable Withholding tax?
And who will shoulder this (buyer or seller). Assuming no agreement made as to who will shoulder the cost.thank you!
- Nimrod Flores
  
  Developers usually have their inventory of properties for sale as ordinary assets and not as capital assets. So it follows that capital gains tax is not applicable.
  
  As to the CWT, if there’s no prior arrangements agreed, then it’s supposed to be withheld by the buyer from the total purchase price. So it is presumed that the buyer retains that amount with him in the first place, to be remitted to BIR and not to be kept by him.
Jhoie

Hi Ms. Joanne, just an inquiry regarding land title under my parents wherein one already died years ago. Do I have to pay estate tax in BIR? Thank you.
- Nimrod Flores
  
  Estate tax is applicable when the heirs settle the estate left by their ascendants. So, yes, you will have to pay that po.
Noel Dy

hi ms joan..may i call you..may i have ur number pls..noel alandy here..my number is 09159369956..may question lang po ako about vat on sale of a condo unit..salamat po
DJ Dimaliuat

Hi Joanne, about VAT…
Does this mean that when I started to lease out my condo, and I used it in business (rentals), when I sell it, it should be subject to VAT?

Thank you.
- Nimrod Flores
  
  If the selling price will be above the threshold for VAT-exempt sale, then yes.
zuwanderer_ de

HI! I would like to know if payment for EWT (6%of FMV or Zone value which ever is higher) is really the responsibility of the buyer, We have taken a house and lot under a conditional sale where the past buyer turned his rights over the property that is not fully paid yet in exchange for a consideration and that we continue his loan from the bank. This year we are about to finish the loan and we asked the bank to give us an estimate of the tax payable. And the list includes EWT. Are they right to transfer this tax burden to us?TIA
- Nimrod Flores
  
  Withholding taxes are amounts that have been withheld by the payor. In your case, since you are the buyer, you are the payor. From this, it is assumed that you have withheld this amount when you paid to the seller.
  
  It’s not about “transferring” that tax burden to you. You were supposed to have withheld that amount from the sale price; you were not supposed to give the entire price to the seller. So, you are presumed to still have that amount in your hands. And when you want to transfer the registration (the Title) to your name, BIR will really ask for that tax which you were supposed to have withheld from the seller.
ronald smith

Hi! I have a question related to VAT.
In 2012 we sign a contract buying a condominium unit with contract price of 2.5Million and including VAT (2.8Million). The downpayment payable in 4 years amounted to 800,000 (which we paid) but due to delay of turn over we file a complain to HULRB for refund and we won the case but the real estate filed an appeal which is ongoing until now.
In case we decided to pay the balance amount (2.8M or 2.5M less 800,000 down payment) this year(2017) , do we need to pay the VAT or not? since our contract price is VAT exempted under the new vat law.
- Nimrod Flores
  
  If the developer is a VAT-registered entity (most, if not all of them, are), then the VAT is applicable even if the price of the property falls below the thresholds enumerated in the above article. In your case, it is likely that the VAT is applicable.
Dennis Perez

hello po… tanong ko lng po regarding sa situation… bumili ako ng property tapos thru pag ibig loan for almost 6 years nakatira na po kami sa property, ngayon nang mabayaran ko na i ask sa developer my tct at i found out location is different from my actual property… ano pa ang pwedeng gawin…
- Nimrod Flores
  
  Talk to the developer and ask them to correct the mistake..
Sheina Mae Asuncion

Paano po kung ung nabenta po e ung land and whole property ng isang beach resort po. ano po tax na need bayaran ni buyer and seller. non vat registered po sila. 2.5M po amount sa deed of sale nung property po.
maraming salamat po.
- Sheina Mae Asuncion
  
  declared po ung nabenta as land and building sa AFS po . Salamat po.
- Nimrod Flores
  
  Since the property is “used in the trade or business of the seller, the sale thereof shall be
  subject to VAT being a transaction incidental to the taxpayer’s main
  business.“. See Section 14 (p)(1) of RR No. 04-2007 for further details.
Georgia

I purchase the lot in 2012 in Provence 320sqm with value of 700k and got date of sale. I pay land tax for five years . Land title was not transfer to my name . I want to Sale the lot now . Some one ask me to pay BIR for this prior to transfer the title to the buyer . Can you please advise is there is law to pay BIR on vacant residential lot . Thanks in advance to give me information on this subject .
- Nimrod Flores
  
  The land tax you said you were paying, is the tax from your local government. The tax you were supposed to pay to BIR is the Capital Gains Tax that is required to be paid within 30 days after your purchase.
  
  Kailangan po mabayaran itong CGT bago kayo mabigyan ng BIR ng Certificate Authorizing Registration. Itong CAR naman, ay yung kailangan nyo from BIR para mapatransfer nyo sa pangalan nyo ang titulo ng lupa.
  
  Kung ibebenta nyo yang lote na yan ngayon, hindi yan pwedeng mapatransfer ng buyer sa pangalan nya kung ang transaction ay between lang sa inyong dalawa. Kasi hindi pa nakapangalan sa inyo yung lupa in the first place. Kaya po kelangan nyo muna itransfer sa pangalan nyo yan bago nyo ibenta. Otherwise, yung bagong buyer ang mamomroblema nyan sa pagpapatransfer sa pangalan nya.
Mike

Do I need to pay capital gains tax when I sell a condo that has not been turned over?
- Nimrod Flores
  
  It depends on whether you are selling your ownership of that unit, or you are just selling your right to purchase that unit.
  
  If the property is already under your name (as it appears in the Registry of Deeds and in the Certificate of Title, or at least in the Deed of Absolute Sale between the developer and yourself), then yes, you’re required to pay the CGT.
  - Janice Belmonte
    
    A follow up question on a unit that was not turned over yet please:
    
    1. What if there has been a change in the reservation of agreement of the condo unit from a sole ownership (2013) to a joint ownership (2017) (Orig. Owner still part of the joint agreement) , what is/are the applicable tax/es for that?
    
    2. Is it correct that the co-owner is charged half of 6% CGT? Even if it’s not a separate or new sale transaction?
Sette

Hi, magtatanong lang po sa current situation namin ngayon. Dec 2016 last year we purchased a condo worth 3.1M and up to March 2018 pa matatapos un payment for equity.
Our developer informed us that due to NEW VAT LAW we need to pay this Jan 2018 yun the 12% VAT. Ang tanong ko po talaga po ba need namin bayaran yun 12% VAT kahit last 2016 pa kami nag purchased? We are aware na meron VAT ang condo units worth 3.2M but because of this NEW VAT TAX kasama na ang 2M up condo price. Please advise po para alam po namin ang sasabihin sa developer. Thanks
- Nimrod Flores
  
  Properties sold by developers are considered ordinary asset po, and because of that, whether or not the price falls below the threshold, VAT applies po talaga. See the VAT section in the above post for reference and further details.
  
  Siguro po yung mistake ng developer nyo is hindi sila nagkocomply nito dati, at nang nasilip na sila ng BIR, ngayon lang sila nag-umpisang magdagdag ng VAT sa presyo nila at maningil from their buyers.
  - JoVi Merc
    
    I would like to clarify po yung Vat is the new 12% vat for condo buyers which will take effect this December 2017? Because according to our sales agent we are not affected by the new 12% vat since we already bought the unit and started on our monthly payments this year. The current vat is for units 3.2m and above as stated by Sette above. Units below 3.2m are exempted from the vat based on the current law.
  - Jay Noel Puente
    
    Hello sir, may gusto po sana ako tanungin tungkol po sa property po.
- JoVi Merc
  
  Yan din question ko although nag assure naman yung sales agent na Hindi raw kami kasama sa new vat dahil na purchase na namin this year yung studio.
francis chang

hi. would a property under a corporation selling a property as capital asset be subject to income tax?
- Nimrod Flores
  
  Capital Gains Tax would apply instead of income tax.
surf2surf

Hello Joanne

I have a tax question.
I a private selling to a private.

1.From what amount will the capital gain tax of 6% be found if,
Salesprice is 4.000.000
The broker fee is 5% of this salesprice.
Can i deduct the 200.000 fee from sales price to find the amount i have to pay in tax?
(BTW the condo is 68,80 Sq/meter and zonal value is 35000 per Sq/meter)

2.Will i need a contact with the broker to Show by paying the tax?

Thanks for the answer in advance.
Chris
- Gothard Rumias
  
  In computing CGT, DEDUCT ALL FIRST your Transactional expenses then compute the CGT? kaya nga capital GAINS tax eh…kasi ibinabase po ang tax computations sa GANANSYA ng nagtinda…
Stephanie Shane Bautista Reid

Question:
Ang pagkakalam ko Dati pa may vat sa mga list price ng condominium? So ung list price nila includ3d na yung vat dun. So dapat wala ng additional 12% vat na sinasabi dahil sa train law. So parang nadoble tuloy yung Vat na babayaran ng buyer?
- Gothard Rumias
  
  ganun po talaga ang mga pinoy, may palusot eh, para kumita pa ng mas malaki…
Gary Davies

Hi joanne. Our corporation owns a house and lot , currently let to my parents. They are getting infirm and want to move in with us. If we sell the property for 4million, what tax is due? The property has no connection with the corporations business and I believe is thus classed as an ordinary asset. In this case, Capital Gains is 6% and no income tax is payable? Or have I got it completely wrong??
Edwin R. Aquino

Good day sir and ma’am, ask ko lng po kasi po ang lupa donate sa bilas ko ng byanan ko, pero dpa nilipat sa name nya, if ililipat po s name nya ang lupa ano po ba ang mga dapat bayaran, ang lupa po ay nasa 545Sq. Mtr.
Any One

Hi. Almost a year ago, I bought a pre-selling condo and I have deposited 95% of the TCP. The developer and I executed a contract to sell. Now, I decided not to continue the purchase but instead sell my right to a friend for a price a bit higher than my amount already deposited. Will my to my friend be subject to CGT? what are the taxes that we need to be aware of? Thanks.
- Frederick Dy
  
  The transfer from the developer to you will be subject to tax, and the transfer to your friend will be subject again to tax. CGT, DST, Transfer Tax, Registration Fee (RD). [email protected]
jonas

Hi my family is about to buy a property with a hotel and commercial area amounting to 80m is it vatable? Ang nasa tax dec is nasa individual and yung Corporation nila is ginamit lang para patakbuhin yung business. Hindi namin assume ang Corporation nila. Cgt lang ba ang bayaran namin?
Mark Unabia

What is the computation of Creditable W-Tax (BIR1606) and Documentary Stamp Tax (BIR 2000OT)
If the selling price is VATable / VAT inclusive? What is the Tax Base?
A. Net of VAT
B. or the Selling Price?
e.g. 3,500,000.00
Thank you
panpan pan

If the Zonal Value is higher than the Selling Price, computation of CWT will be based on the Zonal Value (higher). Question: What if there was an agreement between the buyer and seller that seller will shoulder the CWT upto the selling price and the excess (CWT rate times difference of Zonal and selling price) will be shouldered by buyer, what will be the tax treatment on the excess CWT shouldered by the buyer? is it Other Income and subject to VAT(if VAT registered)? Thanks
- Gothard Rumias
  
  Paano naging income ng buyer yung excess na na-pass on sa kanya eh sya nga tumulong na gumastos para sa gastos sana ng seller? diba EXPENSE NG BUYER YUN na MALIWANAG? 🙂 hehehe
gundam168

Do you pay personal income tax when you sell your own principal home?
- Gothard Rumias
  
  Isa pa to, basahin mo ulit…
Wo Lai

Hi. Good day po. The Seller is VAT-registered and selling socialized housing with selling price of less than 1.5M. Are they exempted from paying VAT? Thank you.
- Gothard Rumias
  
  BASA KA ULIT SA TAAS…ang liwanag eh…maryosep!!! :=) 🙂
Papadom

Hello Nimrod, please educate me about capital gains tax. Here is my
situation, i bought a pre-selling condo and the down payment is payable
in 40 mos, i am on my 20th month as of now (September2018). Someone
wants to buy it, he will continue my monthly payment. He will return all
the money that i put in plus 200k on top. My question is, do i have to
pay Capital Gains Tax? This will be my only property in the Philippines,
is this under construction property considered as my Principal
Residence? Thanks in advance
- Papadom
  
  Sorry, madami na palang post na ganito, magbabasa po muna ako. Pero kung me mas magandang sagot kayo, i will consider din po, salamat
oliver Din

Hi, question po, i have a buyer n gusto dalawang unit for condo,bibilihin nya po ng sabay. 1st unit is 3.5M,2nd unit is 2.7M. same buyer po, ask ko lang magiging vatable po both?

Not adjacent unit
Jf

However, if the seller is a VAT-registered person, the sale of his ordinary asset shall be subject to VAT even if the sales made are within the prescribed threshold. – May I ask po kung anong basis ng statement na to?
Grace Magsino

Good day Ma’am and Sir, ask ko lang po kasi yung lupa ng lola ko po eh binili at binayaran ng nanay ko sa way back 1999 kaso po wala silang pinirmahang deed of sale that time pero recognize naman nun mga kapatid nya n sa nanay ko na yung lupa. Nagkaron po ng deed of sale last Oct 2019 lang mga kapatid na lng ni nanay yun pumirma kc patay na po ang lola ko. Panu po matatransfer sa name ng nanay ko yung lupa? Ano anong taxes po ang need bayaran? Ang sabi po nun isang kaibigan namin baka daw po may penalty n yun kasi patay na yung lola ko. Ang lupa po ay agricultural land 2000sqm.

Thank you po in advance sa sagot na ibibigay nyo. Godbless
Julien

I am not engaged in buying/selling/renting properties but i own a condo. If I sell it 3.8M, I still need to pay VAT since I sell it above 3,199,000php, correct?
Romy Galvez

Hi Ms. Joanne. Ibinebenta ko po kasi ngayon yung lote namin at alam ko na ako ang sagot sa Capital Gains Tax. How about yung Documentary Stamps, ako po ba o yung Buyer ang sagot noon?