This Is What Happens When You Don't Pay Your Estate Taxes
Keep track of the payments you need to make to avoid problems concerning your family's properties
In a previous article, we talked about the importance of a will and how it can help settle the properties left behind by a deceased family member. Aside from learning about inheritance and the percentage of inheritance each heir is entitled to, you also need to note the different kinds of taxes that need to be paid involving real estate.
What taxes should be paid by the heirs? How is the tax computed? What happens when you don't pay your estate taxes? Lawyers Alejandro M. Tupas III and Adrian B. Campilla share these insights:
Q: Our family is worried mostly about inheritance tax. How is this computed?
A: Inheritance tax is properly called in the Philippines as estate tax. Estate tax is a tax on the right of the deceased person to transmit his/her estate to his/her lawful heirs and beneficiaries at the time of death. Simply put, it is a tax on the “right of transferring the property.”
This is computed based on the Net Estate of the decedent, or the remaining estate once all the debts of the person who died (funeral costs, expenses of administering the estate, and other deductions allowed) are subtracted from the total assets. To get the Estate Tax due, the Net Estate is multiplied by a certain percentage, based on the following graduated rates:
Q: As an heir, what is my tax liability?
A: You are liable for the whole taxable amount, divided among co-heirs, if any, depending on the value of the Net Estate. Take note that distribution of assets is only allowed after payment of the obligations (including taxes,debts, and other charges) has been made. (Section 1, Rule 90 Rules of Court)
Q: What happens when estate taxes remain unpaid?
A: As mentioned, assets will not be distributed accordingly until the estate tax is paid. It is imperative that payment and filing of the Estate Tax Return be made within six months from the decedent’s death. Otherwise, tax due shall be subjected to further interests and surcharges. Consequently, the properties may not be transferred to the heirs or third parties without proof of payment of estate taxes.
Q: My parents’ house and lot were under their names until they passed away three months ago. I am an only child. How deep in debt am I in real estate taxes?
A: If the property stays under the name of the deceased after six months from death, then the real estate property will be liable for penalties for delayed filing of estate taxes. This will be in addition to surcharges and compromise penalty fees, computed on an annual basis.
Q: Will I be able to get out of paying taxes if I sell my assets to a potential heir instead?
A: No. One may consider selling property to a potential heir (except a spouse) rather than allowing it to become part of the estate. But the sale of real property will still be charged 6% capital gains tax, 1.5% documentary stamp tax, and 75% of 1% local transfer tax. Compare this with estate tax, which has a maximum effective rate of 16%. Just make sure that the heir who will buy the property has the capacity to buy and will actually purchase the property at a considerable amount.
Q: What is the process for donating property to an heir? What taxes are involved?
A: If the potential heir has no capacity to buy, one may just donate the property to the heir. Donor’s tax has a maximum effective rate of 12.5%, which is still lower than the maximum effective estate tax rate of 16%. The amount or value of the asset donation is also already carved out from the estate, reducing the taxable estate. It’s important to know that if you donate to a stranger (someone who is not your brother or sister, ancestor or lineal descendant or first cousin), the donor’s tax goes up to 30%.
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