Buy & sell of real properties, how taxed?
Realty business had not been new in the country. Realty business nowadays are even becoming more aggressive and sophisticated with the advent of technological advancements on design and marketing their products. Apart from that, let us try to see the industry applicable taxes.
Tax implication of real property disposition basically depends on its classification for tax purposes: ordinary asset or capital asset. Ordinary assets simply refers to those used in business, while capital assets refer to those not used in trade or business. As an example, a land used as a factory site, or warehouse site or office site is an ordinary asset, while, a land bought for anticipation of future increment of value and for which, the same is booked as an investment is a capital asset. Circumstances of the owner, e.g. engagement in trade or business, and actual usage of the real property are important factor for such classification. An owner may not be a businessman but the property may have been rented out making it an ordinary asset. On the other hand, an owner maybe a businessman but the property disposed is not used in trade or business, like its residence, and so it will be classified as a capital asset.
An ordinary asset is subject to the following rules upon its bona fide transfer for a consideration:
* 12% value-added tax (VAT)
* 1.5% documentary stamp tax (DST)
* 1.5 to 6% creditable withholding tax (CWT), depending on the gross selling price to be withheld by a buyer if the seller is engaged in trade or business
* 6% creditable withholding tax if the seller is not engaged in trade or business
* Local transfer tax with the LGU, and registration fees with the Registry of Deeds of approximately 1%
* 30% donor’s tax as an indirect gift if the valuable consideration is less than the fair market value of the property
A capital asses on the other side is subject to the following:
* 1.5% documentary stamp tax (DST)
* 6% capital gains tax (CGT) based on the gross selling price or fair market value of the property, whichever is higher
* Local transfer tax with the LGU, and registration fees with the Registry of Deeds of approximately 1%
Main difference of the two lies on the VAT and income tax. No VAT on capital asset as the seller is not in furtherance of a trade or business and VAT is a business tax. 30% income tax on ordinary asset is based on net income after deducting the cost and necessary expenses of the sale, while 6% on capital asset is based on the gross selling price or fair market value of the property, whichever is higher, without any deduction, normally. Accordingly, to determine for tax savings, the author suggest that a proper study be made as there could be some tax minimization schemes that may help legally reduce tax dues.
In either case of the above classifications, a Certificate Authorizing Registration (CAR) that will authorize the Registry of Deed to transfer the title in the name of the new owner is necessary. It is issued upon finding of the BIR-one time transactions (ONETT) that the correct taxes had been paid . Should there be deficiency taxes, then the BIR shall first assess the corresponding tax and require payment of the same prior to the issuance of the CAR. Upon approval of the CAR, and along with the other requirements of the registry of Deeds, the new title in the name of the buyer shall be issued.
Related link:
a. Requirements for transfer of Condo CAR in Makati City
Tags: CAR, certificate authoring registration, real property, realty business, registry of deeds
Hi Garry,
Just droppin by here. Nice template.
At the office, my subordinates were arguing on the difference between ordinary assets and capital assets. I just told them to define ordinary assets. Then, whatever are not ordinary assets, are capital assets. I think both capital and ordinary assets are used in business. The difference lies on how they use the assets in business. They use it for normal (primary) business operations (e.g., trading equity securities for equity holdings company) or for other business operations (e.g., investments in equity for a hotel company). The first equities being inventory, the second being an investment. But whether inventory or an investment, those assets are used in busines.
thanks, Vic. Yap, I agree. Maybe you can refer them to Sec. 39 of the Tax Code for some technical definition of capital and ordinary assets. As to real properties, the BIR made some guidelines (RR 17-03, i think) for some variations. Topic is quite interesting as many tax saving schemes are being formulated in the area of disposing properties.
who is liable or resposible to pay extended witholding tax is the buyer or the seller? and what is an extended witholding?
I bought house an lot in one of the subdivision by have an In-house financing scheme payable in 24 months. Now my question is that i am responsible to pay an expanded witholding? Natapos ko na po kasi lahat bayaran ang 24 months ng selling price agreement. May mga babayaran ba ho ako sa developer to transffer the title in my name? pwede din ho bang ma isama ang pangalan ng anak ko who is 4 years of age sa title of deeds?
expanded withholding tax (EWT) is the liability of the payor or buyer as a mandate of the law. However, the same is deducted from the proceeds paid to the seller. To understand more on how withholding taxes works, please click here.
In that industry, it is normally the broker who will take care for you the related withholding obligations. Likewise, the seller normally handles the transfer of title to your name. All you have to do is to ask for these documents from the seller or broker. As to fees on the transfer of title, kindly check your Deed of Sale or Contract to sell as it is normally agreed upon. Normal fees include registration fees and transfer fees after the release of the Certificate Authorizing Registration (CAR) from the BIR. You cannot include the name of your 4-year old son/daughter because of minority. Title shall be in your name.
The condo price that I’m interested to buy is Php2.9M + VAT. This is not a pre-selling property. The condo building is aleady constructed but the unit has not been used. I’m a balikbayan and would like to use this as a second home. Now, my questions are (1) Are balikbayans exempted in paying VAT since I will be using this as a residence when vacationing in the Phils. (2) Is VAT paid by the seller or the buyer? (3) How do you calculate VAT on this particular property? Is it upfront? Im planning to give a downpayment of 25% and the rest to be paid in 5 years. Thank you for your help.
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