Taxes on real estate transactions

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).

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  • april

    Hi, thank you so much for this wonderful information. If i havent read about this today we will incur a penalty on our lot purchased a month ago. we havent paid the capital gains stock yet coz we will shoulder it….
    thanks.

  • Kathlyn

    When theres a sale of house and lot who shoulders doc stamps? Please and thank you!

  • Kathlyn

    Hope you could get back to me. Thanks!

  • nicekitty

    Nice article. Very informative. Just a suggestion, I think this article might be improved (and thus get more credence) by paraphrasing or quoting a section of the real estate tax laws. It could had also had some attached references or included a document links. =)

  • dante

    Ask ko lang po who shoulders docs stamps in sale of real property? tnx

  • alvinpornasdoro

    in foreclosure sale, what is the reason behind why capital gains tax and documentary stamp tax be paid after redemption period? what specific law on taxation governed, jurisprudence of the supreme court.

  • candy

    I bought a house and lot situated in Bauan, Batangas last Oct 2005. how much (or percentage of penalty) would it cost me if I am gonna pay or settle the capital gains and docs stamps this year? Is it possible or better to settle the Cap gains and Docs stamps first? coz I am not so busy these past 3 years (no source of income and on medication).

    Thank You very much.

  • elaine

    Kathlyn and Dante: As a general rule, doc stamps are paid for by the BUYER. Unless there’s a stipulation that SELLER pays it.

  • elaine

    Dante: In foreclosure sales the reason why buyer in foreclosure pays capital gains and doc stamp only after foreclosure is because the mortgagor has a period of one year erfrom registration of sale to redeem foreclosed property. Right of buyer in foreclosure is inchoate before such expiration. Upon expiration, and without exercise of redemption, buyer in foreclosure’s right becomes complete. He will then have to pay CGT and DST. No need for jurisprudence. Check out Act 3135 on EJF or Rule 68 of Rules.

    Hope its helpful.

  • Shane

    This one is so helpful. If I buy a foreclosed property from a bank on loan financing on a 5-year term, do I have to pay the CWT right away? And since I am not engaged habitually in real estate, does it automatically mean I will be paying 6% of the gross selling price plus zonal value. Thanks a lot!:)

  • yvaine

    Hi! My father bought a land some 26 years ago. He finished paying after 5 years, but forgot to transfer the land to his name.

    We are now trying to transfer the land to his name, but we have to pay neglected taxes for the past 23 years. We had a BIR employee compute the back taxes, and it amounted to an astounding 127k!

    Can you help me with the computation? The BIR employee would not elaborate on how she came up with the values. Thank you.

  • Tanya

    thank you for the computation. it is a great help to me.

  • Joseph Reyes

    How do you compute the capital gains tax in the case of a residential condominium if the price per deed of sale is P1.6M? How is the value of the building improvement determined and who determines it?

    How can you apply for the exemption to capital gains tax as mentioned below? Do we write a letter to the BIR informing them of the intention? Whom do we submit it to and what are the necessary supporting documents required?

    “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.”

    I am about to sell my residential condo to buy a new home and would appreciate and advise.

    Regards,
    Joseph

  • Julia de Chavez

    Re: 6% capital gains tax for residential owners, it’s based on gross selling price or zonal values whichever is higher. How come the government did not even consider the property owner’s costs in buying his lot and in building his house? The purchase price is not all gains for the owner. Let’s say he’s selling his house and lot at P2.0M but he spent P1.0M in buying lot and in onstructing his house. Is it not just fair that the capital gains tax should be based on the gain of P1.0M? His house is not a mushroom that just erupted on his lot. Cannot the government review this capital gains tax regulations and help ease the burden of the small property owners? I wonder if somebody could bring this to the goivernment’s attention. Thank you.

  • Yan

    hi, i’m going to purchase a property from a seller. the seller would apply for the capital gains tax exemption since he’s using the proceeds to buy a new property. i was advised to pay for the doc stamp and the rest and to transfer the title to my name on our own. my question is that, with deed of absolute sale on hand, can i process the transfer of title to my name even if he didnt pay the capital gains tax and apply for the exemption on his own. can i proceed with the transfer? or should i wait for any document from him after he applied for the exemption before i can apply for CAR from BIR in order to continue processing the transfer of title. can you please advise. thanks.

  • http://facebook rhodora gabilo

    ibenta po namin ng father ko ang aming property d2 sa grandvalley subd. sa angono rizal(not well developed subd), pano ko po malaman ang zonal value ng lupa d2 to be the bases of our selling price and magkano po ba ang dapat bayaran sa amilyar (percentage) yun po kase dati may ari ng lupa ay di nag bayad kya kami po mag shoulder. saan po ibase ang computation ng amilyar, sa deed of sale po ba o yung original price nung pag ka bili ng dati may ari sa lupa. gaano rin po k tagal m approve ang housing loan sa pag-ibig? thanks po!

  • Karen

    Hi. I hope this query is not too late.
    My mom bought a residential land in Davao City and we have been using it as our residence there. She bought it in 1995 i think. Are we required to pay for capital gains tax?
    Thanks.

  • Evelyn

    I purchase an agric. land in 1997. Have seller’s deed of sale but seller failed to pay for capital gains tax. Just sold the same property in 2009. If we register deed of sale (1997) what fees do we pay? Bought parcel is half of the property in the Mother Title. If we annotate deed of sale, do we need a survey, and if our seller died in 2005, do we pay estate tax, too? THanks

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  • Veronica

    Hi, I just stumbled upon this now. I hope I still get a reply since last post was in 2010. If we sell our condo which is now under a condotel management. Is the property considered ordinary asset? If it was bought at 6M and if the transaction sale is 6.9 and the net sale after everything paid commission, etc. how much will be the capital gains. Is it cheaper if it computed as a capital asset? Thanks for the reply.

  • Cathe Bersamin

    What if it’s not a gain, but it’s a loss? Required pa din po ba magbayad ng tax? :)

  • james

    yvaine, i can show you how a capital gains tax is computed if you could email me the details such as the actual selling price, date of sale, fair market value of the lot and/or house and the location of the property as appearing in the tax declaration. thanks

  • james

    joseph reyes, the value of the improvement is determined by the local land assessor. just go to the assessor’s office located in the municipality or city where the land is situated. ask for the tax declaration of the improvement and the fair market value appearing in the tax declaration is the value of the improvement for capital gains tax purposes…..with regards your query on the availment of tax exemption, you have to open an escrow agreement with a BIR-accredited bank and submit that together with the other documents required of a regular capital gains tax case, to the BIR office having jurisdiction over the place where your condo is located. remember, your letter should state that you intend to buy a new principal residence within 18 months from the sale of your condo