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Capital Gains Tax vs. Income Tax When there is a sale of real estate, automatically people think that they have to pay Capital Gains Tax (CGT). This is not necessarily the case. CGT is a tax on the gain from the sale of  capital assets. Regular corporate income tax (RCIT) [for corporations] and regular income tax [for individuals] apply to the sale of ordinary assets while CGT applies to the sale of capital assets.  Thus, we first first have have to determ determine ine whethe whetherr the asset being sold is is a capital capital or an ordina ordinary ry asset asset so as to know the proper tax rate to be used and the BIR form to be used, among others. Capital assets vs. Ordinary assets  The term term “capital “capital asset assets” s” is define defined d negativel negatively y in Sectio Section n 39(A)(1) 39(A)(1) of the Tax Tax Code Code as follow follows: s: “(1) Capital Assets. – the t he term ‘capital assets’ means property held by the taxpayer (whether or not connected with his trade or business), but does not include • stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or • property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or • property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; • or real property used in trade or business of the taxpayer.” As applied to the real estate industry, the terms “capital assets” and “ordinary “ord inary assets” are defined in Section 2(c) of Revenue Regulations (RR) No. 7-2003 dated December 27, 2002. It’s essentially the same as the above definition. It has an additional provision, though, on real properties acquired by banks throughforeclosure sales – the same are considered as their ordinary assets but banks shall not be considered as habitually engaged in the real estate business for purposes of determining the applicable rate of expanded withholding tax. In simple terms, if the property is not ordinarily held for sale (as inventory) or used in business and subject to depreciation, then the property is a capital asset. Now, if a seller is engaged in the real estate business, and the property is one he holds out for sale to the public, then the property may be considered as an ordinary asset. [Note that there may be instances i nstances when a seller is engaged in the real estate business but the  property  proper ty is not held held for sale or used used in busin business ess or was idle for for a long long time time – this is is one of the instances when the property may be considered a capital asset.] Conversely, if a seller is not engaged in the real estate business, and the property is not used in business and subject to depreciation, the property may be considered as a capital asset, the sale of which is subject to CGT. Going now to the creditable withholding tax base, the withholding agent/buyer is required to withhold a creditable withholding tax based on the higher of the following: a) gross selling price/total amount of consideration, or b) the fair market value determined in accordance with Section 6(E) of the Code.

Under Section 2.57.2 (J) of Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001, the percentages of taxes to be withheld are as follows: A. Upon the following values of real property where the seller /transferor is habitually engaged in the real estate business as per proof of registration with the HLURB or the HUDCC or other satisfactory evidence (for example, he/it consummated during the preceding year at least six taxable real estate transactions, regardless of amount): a)With a selling price of Seven Hundred Fifty Thousand Pesos (P500.000.00) or less 1.5% b)With a selling price of more than Five Hundred Thousand Pesos but not more than Two 3.0% Million Pesos (2,000,000.00) c)With a selling price of more than Two Million Pesos (2,000,000.00) 5.0% B. Where the seller/transferor is not habitually engaged in the real estate business (but the 6.0% real estate sold is an ordinary asset) C. Where the seller/transferor is exempt from creditable withholding tax in accordance with Section 2.57.5 of Revenue Regulations No. 2-98 [When the seller is exempt from income taxes. As earlier noted, the creditable taxes withheld serve as ad vance Exempt payment of income taxes. So when a seller is tax-exempt, it follows that no tax should be withheld from his income.] Please note that the sale of foreclosed properties by banks is subject to creditable withholding tax of 6% because banks are not considered as habitually engaged in the real estate business, and properties acquired by banks through foreclosure sales are considered as ordinary assets pursuant to Revenue Regulations No. 7-2003.

Sample CGT computation A residential condominium in Makati City with a floor area of 50sqm has a Selling Price (SP) of  1.0M. The existing zonal value per square meter for that condo in Makati is currently Php50,000/sqm. You have called the owner and found out that he is not engaged in the real estate business. He also told you that as part of the deal, the buyer shall shoulder the CGT. As the buyer, how much is the CGT which you will have to pay the seller on top of the selling price? First let’s compute for the Fair market Value (FMV): FMV=Zonal Value x Floor Area =50,000 pesos/sqm x 50sqm =2,500,000 pesos Since FMV is higher than SP, we shall use FMV to compute the CGT: CGT=6% x FMV =0.06 x 2,500,000 pesos =150,000 pesos  Therefore, the buyer shall have to shell out an additional 150,000 pesos.

Note that while technically, the CGT is always the responsibility of the seller, and that if the buyer shoulders the CGT, it is in effect part of the selling price to be compared to FMV for purposes of computing the 6% CGT, I noted that the practice of banks is to compute the CGT this way. Now, what if you called up the seller and told him that you are willing to buy the property but he should shoulder the capital gains tax as the seller, then he counters your offer and says he is willing to shoulder the CGT up to his selling price and the buyer shall shoulder the CGT for the excess or the difference between the SP and FMV, how do you compute for the CGT? First, let’s compute for the excess or difference between the SP and the FMV: Excess=FMV-SP =2,500,000pesos – 1,000,000pesos =1,500,000 pesos Now, let’s compute for the CGT to be shouldered by the buyer: CGT for the buyer =6% x Excess =0.06 x 1,500,000 pesos =90,000 pesos  The CGT to be shouldered by the seller is as follows: CGT=6% x SP =0.06 x 1,000,000 pesos =60,000 pesos  Take note that the total CGT is 90,000 pesos + 60,000 pesos = 150,000 pesos, which is consistent with our first computation. The CGT was just split between the buyer and the seller. As investors, we should always try to negotiate for the best terms and in relation to this particular example, always try to have the other party shoulder the CGT.  The seller will still be the one to file the CGT and he shall have to file the return in an Authorized Agent Bank within the Revenue District where the property is located in Makati, within 30 days the deed of sale was executed. When buying a foreclosed property, the buyer often shoulders the Documentary Stamp Tax (DST). In the Buena Mano Green Tag Foreclosed Property listings for example, it is explicitly stated that DST is for the account of the buyer and DST is 1.5% of the Selling Price (SP) or Zonal Value (ZV), whichever is higher. To illustrate, I’ll reuse the example I used in my post about CGT. Sample DST computation: Example: A residential condominium in Makati City with a floor area of 50sqm has a Selling Price (SP) of 1.0M. The current zonal value per square meter for that condo in Makati is currently Php50,000/sqm. It is stipulated that the buyer shall shoulder DST. How much is the DST? First let’s compute for the ZV:

ZV=Zonal Value x Floor Area =50,000 pesos/sqm x 50sqm =2,500,000 pesos Since ZV is higher than SP, we shall use ZV to compute the DST: DST=1.5% x ZV =0.015 x 2,500,000 pesos =37,500 pesos  Therefore, the buyer shall have to pay 37,500 pesos for the DST. Assuming that you already have a property which you intend to sell or lease out, it is important to know whether or not VAT applies to your real estate transactions, and how you can avoid the imposition of VAT. Same goes if you intend to buy a foreclosed property. As a general rule, 12% VAT shall be imposed on the sale of goods and services. The VAT based for goods sold shall be the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor, while the VAT base for services sold shall be the gross receipts derived from the sale or exchange of  services, including the use or lease of properties. Exceptions  The exceptions to the general rule are enumerated in Section 109 of the Tax Code, as amended. The portions pertinent to real estate transactions are (P), (Q), and (V) of Section 109 quoted hereunder for your reference: “(P)Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, residential lot  valued at One million five hundred thousand pesos (P1,500,000) and below, house and lot, and other residential dwellings valued at Two million five hundred thousand  pesos (P2,500,000) and below: Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amounts herein stated shall be adjusted to their present values using the Consumer Price Index, as published by the National Statistics Office (NSO); (Q)Lease of a residential unit with a monthly rental not exceeding Ten thousand pesos (P10,000): Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO);  xxx  (V)Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or  receipts do not exceed the amount of One million five hundred thousand pesos (P1,500,000): Provided, That not later than January 31, 2009 and every three (3)  years thereafter. the amount herein stated shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO);  xxx” (underscoring ours)  The above provisions are explained further by Section 4.109-1(B)(p)(4) of Revenue Regulations (RR) No. 16-2005 which provides:

“Sec. 4.109-1 — VAT-Exempt Transactions. —   xxxxxxxxx  (B)Exempt transactions. —  (1)Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from VAT:  xxxxxxxxx  (p)The following sales of real properties are exempt from VAT, namely:  xxxxxxxxx  Sale of residential lot valued at One Million Five Hundred Thousand Pesos (P1,500,000.00) and below, or house & lot and other residential dwellings valued at Two Million Five Hundred Thousand Pesos (P2,500,000.00) and below where the instrument of sale/transfer/disposition was executed on or  after July 1, 2005; Provided, That not later than January 31, 2009 and every  three (3) years thereafter, the amounts stated herein shall be adjusted to its  present value using the Consumer Price Index, as published by the National Statistics Office (NSO); Provided, further, that such adjustment shall be  published through revenue regulations to be issued not later than March 31 of each year; If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose of utilizing the lots as one residential lot, the sale shall be exempt from VAT only if the aggregate value of the lots do not exceed P1,500,000.00. Adjacent residential lots, although covered by separate titles and/or separate tax declarations, when sold or disposed to one and the same buyer, whether covered by one or separate Deed of Conveyance, shall be  presumed as a sale of one residential lot.“ (q)Lease of residential units with a monthly rental per unit not exceeding Ten Thousand Pesos (P10,000.00), regardless of the amount of aggregate rentals received by the lessor during the year; Provided, that not later than January 31, 2009 and every three (3) years thereafter, the amount of P10,000.00 shall be adjusted to its present value using the Consumer Price Index, as published by the NSO; The foregoing notwithstanding, lease of residential units where the monthly  rental per unit exceeds Ten Thousand Pesos (P10,000.00) but the aggregate of  such rentals of the lessor during the year do not exceed One Million Five Hundred Pesos (P1,500,000.00) shall likewise be exempt from VAT, however, the same shall be subjected to three percent (3%) percentage tax. In cases where a lessor has several residential units for lease, some are leased out for a monthly rental per unit of not exceeding P10,000.00 while others are leased out for more than P10,000.00 per unit, his tax liability will be as follows: 1.The gross receipts from rentals not exceeding P10,000.00 per month per unit  shall be exempt from VAT regardless of the aggregate annual gross receipts. 2.The gross receipts from rentals exceeding P10,000.00 per month per unit shall be subject to VAT if the aggregate annual gross receipts from said units only  (not including the gross receipt   s from units leased for not more than P10,000.00) exceeds P1,500,000.00. Otherwise, the gross receipts will be subject to the 3% tax imposed under  Section 116 of the Tax Code. The term ‘residential units’ shall refer to apartments and houses & lots used for  residential purposes, and buildings or parts or units thereof used solely as dwelling places (e.g., dormitories, rooms and bed spaces) except motels, motel rooms, hotels and hotel rooms. The term ‘unit’ shall mean an apartment unit in the case of apartments, house in the case of residential houses; per person in the case of dormitories, boarding houses and bed spaces; and per room in case of rooms for rent.” 

Pay the transfer tax at the CTO PHP 20,850 (0.5% of the property price)

Secure registration

PHP 21,261 {registration fee consisting of PHP 8,796 for first PHP 1,700,000 + PHP 90 for every PHP 20,000 or fraction thereof in excess of PHP 1,700,000 + PHP 199.56 legal research fee (1% of the registration fee) + PHP 30 judicial form fee + PHP 300 primary entry fee (PHP 30 per document) + PHP 480 registration fee for specific documents (PHP 120 per document) + PHP 120 fixed entry fee for specific documents (PHP 30 per document) + PHP 40 legal research fee for specific documents (PHP 10 per document) + PHP 60 annotation fee (PHP 30 per document) + PHP 75 fee for issuance of new transfer certificate of  title}

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