On taxes on purchasing real property

The best investment on earth is earth,” said Louis J. Glickman, an American real estate investor and philanthropist.

Never has a truer word been spoken for investing on real estate in the Philippines. In its report entitled, “Top 10 Forecast for 2019,” Colliers International, a Canada-based commercial real estate services organization, foresaw strong demand for commercial and residential spaces, with the growing number of Chinese offshore gaming employees, local professionals, and foreign food and beverage and home furnishing tenants.

“Over the years, the Philippine real estate market has never been more vibrant as it continuously soars driven by the country’s bullish economy and strong investment inflows which trigger positive ripple effect across all property sectors,” said locally-based real estate solutions portal Filipino Homes.

“Hence, it would come as no surprise that real estate investment is still one of the best opportunities available… [N]ow is the best time to get involved.”

Global Property Guide, however, reported that investing on Philippine real estate could mean high transaction costs.

“[G]ross rental yields in Metro Manila remain good, ranging from 7.01 percent on the very smallest condominium units of 45 sqm. to 7.16 percent on 80 sqm. condominiums.”

“This does not mean that foreign investors should necessarily rush to invest in Manila, because transaction taxes (known as ’capital gains taxes,’ but not actually such), and (if observed) official income taxes applicable to non-resident investors, are high.”

Here are the taxes that may be imposed on the purchase of Philippine real estate.

One of these taxes may include the capital gains tax (CGT), which is a final tax assessed on the presumed gain derived by Filipino citizens, resident aliens, estates, and trusts from the sale or exchange of real property classified as capital assets. The current rate of the CGT is 6 percent of the gross selling price or current fair market value as may be determined by the Commissioner of Internal Revenue, whichever is higher.

Capital gains presumed to have been realized from the sale or disposition of a natural person’s residence, the proceeds of which are fully utilized in acquiring or constructing a new principal residence within 18 calendar months from the date of such sale or disposition, are exempted from CGT, however.

Potential investors may also have to pay real property taxes (RPT), which must not exceed 1 percent of the assessed value of real property located in a province or 2 percent of such assessed value in a city or a municipality within the Metropolitan Manila area. In this regard, real property shall be assessed on the basis of its actual use—the purpose for which the property is principally or predominantly utilized by the possessors thereof, regardless of its location and the persons using it.

RPT may likewise be assessed on equipment, instruments, and machineries found the real property, whether they are attached, permanently or temporarily.

The following properties are exempt from RPT assessment:

real property owned by the Republic of the Philippines or any of its political subdivisions, except when the beneficial use thereof has been granted to a taxable person, with or without consideration thereon;

charitable institutions, churches, parsonages, mosques, covenants, and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable, or educational purposes;

machineries and equipment directly and exclusively used for supply and distribution of water and/or generation and transmission of electric power;

real property owned by duly registered cooperatives; and

machinery and equipment used for pollution control and environmental protection.

Documentary stamp taxes (DST), a tax imposed either on the transaction or the document facilitating said transactions, as provided under the National Internal Revenue Code and the Train Law, may be imposed on the purchase of real property.

DST on deeds of sale and conveyances and donation of real property is imposed as follows: (a) P15, when the consideration, or value received or contracted to be paid for such realty, after making proper allowance of any encumbrance, does not exceed P1,000; and (b) P15, for each additional P1,000 or fractional part thereof in excess of P1,000. The parties may agree on who shall be liable for the DST or how they may share on the cost thereof.

Transfer tax is another imposable tax for such sale.

Thus, the province may impose a tax on the sale, donation, barter, or any other of transferring ownership or title of real property at a rate of not more than 50 percent of the 1 percent of the purchase price or the fair market value, whichever is higher. The transfer of real property pursuant to the Comprehensive Agrarian Reform Law, however, shall be exempt from transfer tax.