Computing real property taxes in the Philippines

Posted on July 25th, 2007

If you’ve owned real estate for some years now, chances are you already know what you need to pay government on a yearly basis.

Those still thinking of acquiring a house and lot or commercial and industrial land, be warned that aside from the one-time tax due on the sale, mortgage, or exchange of real property, there is also the regular yearly taxation–basic and special education fund–that you need to settle religiously.

The first of these yearly levies on properties is called the basic real estate tax. The other is the special education fund tax.

How does government determine how much basic tax owners should pay for their properties?

Central to this determination is what is called the fair market value (FMV) of a property.

FMV, defined, is the highest price a property can command if put up for sale in an open market, allowing a reasonable time to find a buyer for it, with both seller and buyer acting prudently and knowledgeably, and assuming there is no undue stimulus affecting its value.

For purposes of taxation, the determination of the fair market value and the pegging of the assessment levels for land and improvements like houses or buildings are conducted by municipal assessors for municipalities within Metro Manila and the provincial assessors for municipalities outside the metropolis. Cities have their own government assessors.

The FMW and the assessment level are important in determining the assessed value of real estate.

Government pegs the yearly basic real estate and special education fund (SEF) taxes on the assessed value of land and the improvement thereon.

Current assessment levels for land are: 20 percent for residential, 50 percent for commercial, industrial, and mineral, 40 percent for agricultural, 20 percent for timber, and 15 percent for scientific, cultural, and hospital.

Improvements like houses or buildings are assessed separately and have assessment levels different from land.

Let’s say for example that we want to compute the assessed value of a residential land whose fair market value is pegged at 2 million pesos by the municipal assessor.

The formula for getting the assessed value of this property is: fair market value x assessment level = assessed value. Hence, 2 million x 20 percent = 400,000 pesos.

Since we already have the assessed value for this property, we can now compute the basic real estate tax.

To do this, we multiply the assessed value by the rate of basic real estate tax, which is pegged at not more than 1 percent for the provinces and not more than 2 percent for cities and Metro Manila municipalities.

The basic real estate tax for residential land with an assessed value of 400,000 pesos is computed this way: assessed value x tax rate = amount of tax.

Let us say that this land is located in a town in Cebu, where the tax rate is 1 percent, then the amount of tax for a residential land with an assessed value of 400,000 is 4,000 pesos.

If, on the other hand, this land is located in Cebu City or in a Metro Manila municipality, where the tax rate is pegged at 1.5 percent (remember that the tax rate for these areas must not exceed 2 percent), then the tax amount can be arrived at by multiplying the assessed value of 400,00 with the tax rate of 1.5 percent. The tax amount therefore, in this case, is 6,000 pesos.

The assessed value is still used in computing the special education fund tax, which is a uniform rate of 1 percent. To get the tax amount, multiply the assessed value by the tax rate of 1 percent. So, 400,000 (assessed value) x 1 percent (special education fund tax rate) = 4,000 pesos (tax amount).

The following tax computations are only for land with fair market value of 2 million pesos. If there is an improvement on the land, like a house or a building, the assessed value is computed separately. This is because there are different assessment levels for improvements.

Add the tax dues for land and the improvement to get the total tax amount.

Basic real estate and special education fund taxes are paid in four installments, due on or before March 31, June 30, September 30, December 31 of the current year. Advance payments are entitled to not more than 20 percent discount while delinquent payments are subject to interest of 2 percent per month.

Computing the tax due on the sale or purchase, exchange, mortgage, or donation of real property will be discussed in another post.

Things to remember

* Real estate appraisal for purposes of taxation is based on current and fair market value and uniform within each political subdivision

* Assessment levels of real estate are based on actual use and are also uniform within each political subdivision

* Appraisal and assessment of a property for purposes of taxation are not left to private parties

* Assessed value is arrived at by multiplying fair market value with assessment level