The Philippines uses an adapted form of the “Torrens” system of land registration. This system assures the buyer that that purchase of land with an Original Certificate of Title(OCT) or Transfer Certificate of Title (TCT) or Condominium Certificate of Title(CCT) issued by the Registry of Deeds, is absolute, indefeasible and imprescriptible.
When buying property always verify the authenticity of the title in the Registry of Deeds. If the seller only has a Tax Declaration, be extra cautious. Rule of thumb always requires a title.
Real property can be either an ordinary asset or capital asset. Capital assets are subject to Capital Gains Tax. It is considered an ordinary asset if it is:
- For sale in the ordinary course of business.
- Used in business that the taxpayer claims for depreciation.
- Used in trade or business.
In general, a property that does not belong to the above is capital assets.
Properties can also be classified as capital or ordinary based on who owns it. If the owner is engaged in the real estate business and can present evidence as such, then the property is considered as an ordinary asset.
People engaged in real estate business can be classified as a real-estate dealer, developer, and lessor. A real-estate dealer is a person engaged in the business of buying and selling properties.
The real estate developer refers to a person or company involved in the business of developing, selling or renting properties. Property can be subdivisions, houses, condominiums, townhouses, commercial buildings and memorial lots.
While a real estate lessor is limited to renting residential or commercial properties. Individuals or businesses that do not belong to any of the above are understood as “habitually engaged real estate sellers”, if “they consummated during the preceding year at least six taxable real estate transactions, regardless of the amount”.
Buying or selling property involves a Deed of Sale or Deed of Absolute Sale. It is an authentic deed drafted and signed by a public officer, usually a notary, showing the legal transfer of real estate property ownership. The buyer will need this important document during the registration.
To avoid tax problems, later on, be aware of the taxes and fees involved. Taxes and fees are based on selling price indicated in the Deed of Sale or Zonal Value or Fair Market Value.
Zonal Value is an approved value of real property and used by the Bureau of Internal Revenue(BIR) as the basis for the computation of internal revenue taxes. You can get the Zonal Values here.
Fair Market Value(FMV) or Market Value is described by the Philippine Valuation Standards as “the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion”. In short, FMV is subjective.
Below are the taxes and fees the seller is responsible for paying:
- Income Tax, if the property is an ordinary asset.
- Value Added Tax/Percentage Tax, if the property is an ordinary asset.
- Creditable Withholding Tax, if sold by habitually engaged real estate seller or corporation.
- Capital Gains Tax, if the property is a capital asset. Equivalent to 6% of the selling price on the Deed of Sale or the Zonal Value, whichever is higher.
- Unpaid Real Estate Tax, if any.
- Agent or broker’s commission.
Meanwhile, the buyer pays for the cost of registration:
- Transfer Tax. 0.5% of the selling price, or Zonal Value or FMV, whichever is higher.
- Registration Fee. 0.25% of the selling price, or Zonal Value or FMV, whichever is higher.
- Miscellaneous expenses incurred during the registration process, like notarial fees and loan fees.
- Documentary Stamp Tax. 1.5% of the selling price or Zonal Value or FMV, whichever is higher.
The above sharing of expenses is standard practice. However, the buyer and seller can mutually agree on some modifications as long as it is done during the negotiation period, before the signing of the Deed of Sale.
The Deed of Sale is then taken to the Registry of Deeds to be officially recorded. These are the documents needed when transferring the title ownership:
- Certified True Copy(CTC) of the title, or any applicable.
- Notarized copies of the Deed of Sale.
- The latest Tax Declaration of the property.
- Certificate from the Bureau of Internal Revenue that the Capital Gains Tax and Documentary Stamps have been paid.
- Receipt of payment of the Transfer Tax and Registration Fee.
Aside from those already mentioned, there are other taxes for special cases. Donor’s Tax is levied on a donation or gift, in this case, a real property. It is imposed on the free transfer of property between two or more persons who are living at the time of the transfer.
While Estate Tax or Inheritance Tax is imposed only when a property is transferred upon the death of its owner to his or her lawful heirs or beneficiaries. The property can’t be passed on unless the Estate Tax is paid.
The tax is based on the Net Estate, which is the difference between the Gross Estate(based on the FMV at the time of death) and the allowable deductions(expenses, losses, debts, and taxes) of the deceased. Tax rates are graduated and depend on the Net Estate amount. Read more details here.
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