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