Ask the Pros: What Taxes Do I Need to Pay if I Want to Buy or Sell Property?
The list of applicable taxes differs depending on the mode of transfer
Acquiring property involves paying taxes dutifully as failing to do so might incur penalties. Whether you’re selling or buying one, keep in mind that there are taxes you need to pay to the Bureau of Internal Revenue (BIR) and the Local Government Unit (LGU).
The list of taxes to be paid if a property is inherited likewise differs. In addition to noting the mode of transfer, you also need to differentiate between an ordinary asset and a capital asset.
Accountaholicsph.com explains that “properties like homes, buildings, and empty lots, are assets, which are things that increase the value of a company or a person.” Furthermore, “specifics based on Section 39 of the Philippine Tax Code delineates capital assets from ordinary assets, and taxes will be assessed based on these.”
READ: Here's Why Settling Estate Taxes on Time Can Save You Money
According to the website, capital assets are “any form of real property held by the taxpayer, whether related to his business or not, which are not included among ordinary asset classification.” Simply put, the property isn’t used for business. On the other hand, ordinary assets are properties used “in business or trade by the taxpayer or held by the taxpayer for sale to the customer in the ordinary course of the business.” In short, ordinary assets are used in trade or business such as apartments being rented out and condo units being sold by real estate companies.
To help you get familiar with these taxes, Real Living asked Atty. Mhealler Ycong, CPA for general information you need to know about the applicable taxes when transferring real properties.
What are the applicable taxes in transferring real properties?
If the mode of transfer is through SALE, the seller and buyer need to take note of the following:
For the seller:
If an ordinary asset is involved
A. The following should be paid to the BIR:
1. Income Tax – 20 to 35% (if individual) or 25% (if corporation) on the gain from the sale which forms part of the taxable income. The gain from the sale is determined by deducting the acquisition cost from the Gross Selling Price (GSP).
2. Value Added Tax (VAT) – 12% of the Gross Selling Price
3. Documentary Stamps Tax (DST) – 1.5% of the GSP or the Fair Market Value (FMV), whichever is higher between the two. The FMV is the zonal value as determined by the BIR and the assessed value determined by the City or Provincial assessors, which is usually shown in the tax declaration. Note that the DST can be paid by either the seller or the buyer.
The final annual income tax return is due on or before the 15th day of the fourth month following the close of the taxable year. This falls on April 15 of the next year for individuals, while the date may differ for corporations depending on the fiscal year (the 12-month period begins on a month other than January) adopted.
The final quarterly VAT return is due 25 days after the close of the quarter. As to the DST, it must be filed and paid within 5 days after the close of the month when the deed of sale was executed.
READ: How Do You Protect Your Inheritance from Taxes?
B. The following should be paid to the LGU:
1. Local transfer tax – generally, this should not be more than .50% of the GSP, if the property is located in a municipality and not more than 50% of that, if situated in a city. Thus, the rate differs from LGU to LGU.
This is payable within 60 days from the execution of the deed of sale.
If a capital asset is involved
A. The following should be paid to the BIR:
1. Capital Gains Tax – 6% of the GSP or FMV, whichever is higher between the two
2. Documentary Stamps Tax – 1.5% of GSP or FMV, whichever is higher between the two. As mentioned, this can be paid either by the seller or buyer.
The Capital Gains Tax is payable 30 days following the sale while the DST is due within 5 days after the close of the month when the deed of sale was executed.
B. The following should be paid to the LGU:
1. Local transfer tax – generally this should not be more than 0.50% of the GSP if the property is located in a municipality and not more than 50% of that if it's situated in a city. Thus, the rate differs from LGU to LGU.
The local transfer tax is payable within 60 days from the execution of the deed of sale.
For the buyer
If an ordinary asset is involved
A. The following should be paid to the BIR:
1. Creditable Withholding Tax – 1.5% to 6% depending on the status of the seller (whether he or she is a habitual or not a habitual seller of real estate) which may be offset against the seller’s income tax due at the end of the taxable year
2. Documentary Stamps Tax – same details as mentioned above
READ: Ask the Pros: Can Live-In Partners Co-Own Properties?
If a capital asset is involved
A. The following should be paid to the BIR:
1. Documentary Stamps Tax – same details as mentioned above
If the mode of transfer is through SUCCESSION or through inheritance, which is taken from the deceased’s estate, the following should be filed and paid by the executor, administrator, or the heirs:
A. The following should be paid to the BIR:
1. Estate Tax – 6% of Net Estate. To get the Net Estate, the Gross Estate should be computed first. For Filipino citizens, the Gross Estate consists of all the decedent’s properties, real or personal, tangible or intangible, wherever situated.
The following will then be deducted from the Gross Estate:
- Standard Deduction of Php5,000,000.00
- Claims against the estate and unpaid mortgages
- Property previously subjected to estate tax within five years of the decedent’s death
- Transfers for public use
- The amount received by heirs under RA 4917 (e.g. retirement benefits) as a consequence of the death of decedent-employee
- Family Home, up to Php10,000,000 (based on the current Fair Market Value)
- The net share of the surviving spouse in the conjugal partnership or community property
READ: How Do You Divide Conjugal Property When You Get Annulled?
B. The following should be paid to the LGU:
1. Local transfer tax – same details as mentioned in the transfer through SALE section
Are you familiar with the taxes mentioned above? Remember that the information shared in the article is for general knowledge only. For specific legal advice, please get in touch with a lawyer.
Special thanks to Attorneys Nikki Cortina, Steffi Banaag, Mhealler Ycong, Aila May Alvarez, and Christopher Linag.
