Tax on renting aparment, condo, and other residential dwellings

This post covers tax implications of renting residential dwellings such as an apartment, condominium unit, and a house and lot in both sides-the lessor or owner and the lessee or tenant. Tax implication would depend on the monthly rental of such units. For every lease contract, a documentary stamp tax (DST) at the rate of P3.00 for the first P2,000 and P1.oo for every succeeding P2,000.00 or fractional part thereof payable by either the lessor (the owner or original lessor, if sublease) or the lessee (the one paying the rental for the use and possession of the property).

Monthly rentals exceeding P10,000.00 is subject to value-added tax (VAT) of 12% if the lessor is a VAT-registered. It may be absorbed by the lessor or he/she may pass it on to the lessee based on their agreement. If the lessor is a non-VAT registered, the applicable tax type is other percentage tax (OPT) at 3% and is payable by the lessor only. Lessor shall be liable to VAT even if non-VAT registered if gross receipts from rentals exceeding P10,000.00 will be more than P1,500,000 during a 12 -month period. On the other hand, monthly rentals not exceeding P10,000 is exempted from VAT irregardless of whether or not the lessor’s gross receipts from rentals not exceeding P10,000 exceeds P1,500,000 during a 12-month period.

Likewise, lessor is subject to income tax of 30%, if corporation (limited liability company in other countries), or 5-32%, if individual. As a rule, if the lessee is engaged in trade or business, or in the exercise of its profession where the rental is deducted for its income tax computation, then its periodic lease payments are subject to withholding tax of 5% of gross periodic payment. Said withholding tax is required to be remitted to the BIR through BIR Form No. 1601-E not later than the 10th day of the month following the payment of such rental. Lessee will then issue BIR Form 2307 or Certificate of Creditable Withholding Tax (CWT) to the lessor not later than 30 days from such payment. Upon filing quarterly or annual ITR of the lessor, said withholding tax shall be deducted against its income tax due for the period and the certificates will be attached to the ITR upon filing.

Real estate lessor is subject to income tax only those rentals that is either collected or earned during the taxable period. Rental deposits are not taxable as they are not income until applied as rental at the end of the lease term based on agreement. Advance rental is subject to income tax. On the part of the lessee, adjustments to escalation clauses required by the accounting standards are not yet deductible for income tax purposes. They serve as temporary difference in the ITR.

Failure to withhold on the part of the lessee that is engage in trade or business, or engage in the practice of profession shall mean non-deductibility of such rental payments. If deducted without the requisite withholding, the same will still be disallowed and an assessment equivalent to the amount required to be withhold plus surcharge of 25%, interest of 20% and compromise penalties ranging from P200 to P25,000 depending on the basic amount.

If the lessee is not engaged in trade or business, or is not in the exercise of a profession, no such withholding is required on its periodic payments.

Tags: apartment, condominium, dwellings, EWT, income tax, OPT, penalties, VAT, withholding tax