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:
- Income tax, if the property to be sold is an ordinary asset
- Value-added tax/Percentage tax, if the property to be sold is an ordinary asset
- Creditable Withholding Tax, for real properties sold by habitually engaged real estate sellers
- Capital Gains Tax, if the property to be sold is a capital asset
- Documentary Stamp Tax
- Transfer Tax
- Registration Fee
Now let’s define these things…
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. 🙂
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 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:
|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|
|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|
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