Taxes on real estate transactions

Posted on August 1st, 2007

Jose Reyes, who works in a call center in Cebu City, has been transferred to his company’s main branch in Manila. He wants to move for good and sold his house and lot in a subdivision in Lapu-Lapu City for 2.5 million pesos.

How much is he required to pay in taxes to government for the sale?

The computation of his tax due depends on whether his property is a capital asset or an ordinary asset.

Capital assets refer to properties that are not used in connection with trade, business, or as an income source by the owner.

An example of a capital asset would be a residential house and lot “actually” used as residence by the owner.

On the other hand, properties used in trade or business or as a source of income by the owners are considered ordinary assets.

The applicable tax in the sale of capital assets is the capital gains tax. The tax rate is 6 percent of either the “price per deed of sale” or “zonal value” in case of land.

Government, in deciding which of the price or the zonal value (fixed by the local government unit) to use as basis in the computation of taxes, always goes for the higher amount.

On the sale of the lot with improvement (such as a house), the basis is also the “price per deed of sale” or the “lot zonal value,” whichever is higher, plus the value of the building on the land.

In the case of Mr. Reyes, he sold his family home for 2.5 million pesos. The zonal value of his 500-square meter lot is 3,000 per square meter and the fair market value of his house is 1.5 million pesos.

To compute the total worth of his lot based on the zonal value, we multiply the total area in square meters with the value per square meter. Hence, 500 (lot area) x 3,000 (zonal value per square meter) = 1.5 million pesos. If we add this to the value of his house of 1.5 million pesos, we get 3 million pesos.

Therefore, the basis of the capital gains tax in this case would not be the price per deed of sale or gross selling price but the zonal value of the lot plus the value of the house.

Atty. Jonathan Capanas, University of San Jose-Recoletos College of Law dean, says government considers the sale of a capital asset, no matter how high the price, as a loss to the seller so what applies is a special income tax–the capital gains tax–that is also considered a final tax on the transaction.

The capital gains tax should be paid within 30 days from the notarization of the deed of sale. Late payments are subject to 25 percent penalty.

Also subject to capital gains tax are pacto de retro sales (when vendor reserves the right to repurchase or redeem the property) and other conditional sales like exchanges of properties.

Sale, exchange, or transfer of ordinary assets is subject to creditable withholding tax. The basis is computed in the same manner as capital gains tax while the tax rates range from 0 to 6 percent.

Transactions involving ordinary assets are subject to the regular withholding tax, which is applied on the net income that the seller realized from from the deal. To compute the income realized from the transaction, this is the formula used:

sales - cost = gross income - deductions = net income

While government pegs the tax deducted from the sale of an ordinary asset on the selling price or zonal value of the lot plus value of improvement during the transaction, the amount paid may be refundable if in the computation of the yearly withholding tax, it is shown that the seller did not realize any income from the sale after deducting the cost of acquiring the property and other related expenses.

On the other hand, if the tax due of the seller, based on the net income realized during the sale, turns out to be more than what was paid at the time of the transaction, the seller must pay the difference to government when he or she settles her yearly withholding tax.

Creditable withholding tax is therefore different from capital gains tax, which is already considered a final tax when paid at the time of the sale.

The creditable withholding tax must be paid on the 10th day of the month following the transaction.

The following are the tax rates on ordinary assets:

* 0 % — property is part of a socialized housing program registered with Housing Land Use and Regulatory Board

* 1.5 % — seller is habitually engaged in real estate business and the price of the property is not over 500,000 pesos

* 3 % — seller is habitually engaged in real estate business and the price of the property is over 500,000 but not more than 2 million pesos

* 5 % — seller is habitually engaged in real estate business and the price of the property exceeds 2 million pesos

* 6 % — seller is not habitually engaged in real estate business

Other taxes due on the sale, exchange, or transfer of capital and ordinary assets are: documentary stamps tax (DST) and transfer tax.

DST is 1.5 % of gross selling price or zonal value plus value of the structure (if there is a house or building on the lot), whichever is higher.

The transfer tax is a levy imposed by the local government unit. The rate is not more than 1 percent for properties in the cities and towns of Metro Manila and not more than 1/2 % for properties outside of Metro Manila.

The usual agreement in the sale and purchase of properties in the Philippines is that the seller takes care of the capital gains tax or creditable withholding tax while the buyer pays for the DST and transfer tax.

A person selling his principal residence may be exempted from paying capital gains tax. To quality for the exemption, the seller must be a natural person and will use the proceeds of the sale to acquire a new home. He must also notify the Bureau of Internal Revenue (BIR) within 30 days from the sale of his property of his intention to avail of the exemption. The privilege can be availed of once every 10 years.

When the proceeds from the sale is not fully utilized in the purchase of a new home, the difference will be subjected to capital gains tax.

A sale is considered on installment basis when the initial payment is 25% or less and the seller in this case may opt to pay a portion of the capital gains or withholding tax, which is computed by dividing the initial payment with the total price and then multiplying the quotient with the total tax.

If the initial payment is more than 25%, the transaction is called deferred sale and is tantamount to a cash sale with the seller having to pay the total tax.

In case of sale with mortgage, the documentary stamps tax has to be paid two ways: on the sale (rate is 1.5 percent) and on the mortgage (20 pesos for the first 5,000 pesos and 10 pesos for every succeeding 5,000 pesos).