What Is Capital Gains Tax On Real Estate

What is Capital Gains Tax on Real
Estate?
I’ll try to discuss capital gains tax on real estate in layman’s terms, based on what I
have learned, for purposes of information-sharing. A disclaimer is in order of course:
While great effort has been taken to ensure the accuracy of the discussion here as of
its writing, this is not intended to replace seeking professional services. Do read up
on the relevant laws and regulations also.
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 have to determine whether the asset being sold is a capital or an
ordinary 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 “capital assets” is defined negatively in Section 39(A)(1) of the Tax Code
as follows:
“(1) Capital Assets. – the 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 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 through
foreclosure 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.
Since we are talking about the sale of real property here, we need to know the
definition of “real property”. Section 2(c) of RR No. 7-2003 states that “Real property
shall have the same meaning attributed to that term under Article 415 of Republic
Act No. 386, otherwise known as the “Civil Code of the Philippines.” Article 415 of
the Civil Code provides:
“Art. 415. The following are immovable property:
(1) Land, buildings, roads and constructions of all kinds adhered to the soil;
(2) Trees, plants, and growing fruits, while they are attached to the land or form an
integral part of an immovable;
(3) Everything attached to an immovable in a fixed manner, in such a way that it

cannot be separated therefrom without breaking the material or deterioration of the
object;
(4) Statues, reliefs, paintings or other objects for use or ornamentation, placed in
buildings or on lands by the owner of the immovable in such a manner that it reveals
the intention to attach them permanently to the tenements;
(5) Machinery, receptacles, instruments or implements intended by the owner of the

tenement for an industry or works which may be carried on in a building or on a
piece of land, and which tend directly to meet the needs of the said industry or
works;
(6) Animal houses, pigeon-houses, beehives, fish ponds or breeding places of

similar nature, in case their owner has placed them or preserves them with the
intention to have them permanently attached to the land, and forming a permanent
part of it; the animals in these places are included;
(7) Fertilizer actually used on a piece of land;

(8) Mines, quarries, and slag dumps, while the matter thereof forms part of the bed,
and waters either running or stagnant;
(9) Docks and structures which, though floating, are intended by their nature and
object to remain at a fixed place on a river, lake, or coast;
(10) Contracts for public works, and servitudes and other real rights over immovable
property.”
Thus, it appears that it is not only the sale of land and buildings or houses which we
should be focusing on, but also the sale of the above.
As RR No. 7-2003 is a very important rule on real estate, I have included the said
regulations in this post for your reference. Read it in its entirety. You may download
a copy here. Answers to frequently asked questions can be found in this document.
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 when a seller is engaged in the real estate
business but the property is not held for sale or used in business or was idle for a
long time – this 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.
Section 3 of RR No. 7-2003 provides the Guidelines in Determining Whether a

Particular Real Property is a Capital Asset or Ordinary Asset.
Tax Rate to be Used

When the real property which is a capital asset to the seller is sold, the gross selling
price or fair market value (FMV) [zonal value], whichever is higher, will be subject to
6% CGT. Please refer to the BIR
website http://www.bir.gov.ph/zonalvalues/zonalvalues.htm for the zonal values.
Technically, it’s not really only the gain (selling price less cost) which is taxed,
because even if the seller suffered a loss (that is, the selling price is lower than the
original acquisition cost of the property), there will still be CGT, because a gain is
always presumed.
On the other hand, if the seller is engaged in the real estate business, and the real
property sold is an ordinary asset, the sale will be subject to RCIT [or minimum
corporate income tax (MCIT), when applicable] if the taxpayer is a corporation and
income tax if the seller is an individual.
The proceeds from the sale of the real property will be included in the seller’s global
income (meaning income from all sources – note that domestic corporations and
resident citizens are taxed on all sources of income, whether from within or outside
the country) and only the net income, after allowable deductions such as
depreciation, losses, etc. will be subjected to RCIT, MCIT, or regular income tax,
whichever is applicable.
ADVERTISEMENT
Under Republic Act No. 9337, the RCIT is now 30% on net taxable income
(beginning on January 1, 2009, down from 35%). The regular income tax for
individuals remains at 32%.
Please note that there is an exception to the application of the CGT, and that is the
sale of a principal residence (your own home). This deserves a separate discussion
as I intend to take advantage of this when we purchase our next residence.
BIR procedure
Assuming that you are interested in buying a property from a seller who is an
individual and who is not engaged in the real estate business, the seller needs to pay
CGT on the sale of his real property, unless you have made an agreement that you
as the buyer will shoulder this.
The seller needs to file BIR Form No. 1706 within thirty (30) days after each sale,
exchange, transfer or other disposition of real property. You can download BIR Form
No. 1706 here.
Documentary Requirements
1 ) One original copy and one photocopy of the Notarized Deed of Sale or Exchange
2 ) Photocopy of the Transfer Certificate of Title; Original Certificate of Title; or

Condominium Certificate of Title
3 ) Certified True Copy of the tax declaration on the lot and/or improvement during
nearest time of sale
4 ) “Certificate of No Improvement” issued by the Assessor’s office where the
property has no declared improvement, if applicable or Sworn Declaration/Affidavit of
No Improvement by at least one (1) of the transferees
5 ) Copy of BIR Ruling for tax exemption confirmed by BIR, if applicable
6 ) Duly approved Tax Debit Memo, if applicable
7 ) “Sworn Declaration of Interest” as prescribed under Revenue Regulations 13-99,

if the transaction is tax-exempt
8 ) Documents supporting the exemption
Additional requirements may be requested for presentation during audit of the tax
case depending upon existing audit procedures.
How to File the Capital Gains Tax Return

You just have to file the Capital Gains Tax return in triplicate (two copies for the BIR
and one copy for the taxpayer) with the Authorized Agent Bank (AAB) in the
Revenue District where the property is located, along with the documentary
requirements and the tax due.
In places where there are no AAB, the return will be filed directly with the Revenue
Collection Officer or Authorized City or Municipal Treasurer. You can view the
Revenue District Offices (RDO) here: http://www.bir.gov.ph/directory/rdo.htm. Click
on the concerned RDO.
For example, if you click on RDO 48 – West Makati, you will get
tohttp://www.bir.gov.ph/directory/rdoinner.htm#48. The names of the Revenue
District Officer and Assistant Revenue District Officer as well as their contact
numbers and e-mail addresses, and the address of the Revenue District Office and
the AAB’s within the said RDO may be found there.
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.
Capital Gains Tax Calculator
Fields with an asterisk (*) are required to calculate the Capital Gains Tax. Results are
auto-calculated.
Gross Selling Price or Fair Market Value (whichever is higher) in PHP*
From data entered above, results are auto-calculated and displayed below:
Capital Gains Tax due in PHP
Conclusion
The BIR website (http://www.bir.gov.ph) has a wealth of information on taxes. Refer
to it from time to time. The BIR also has a 24-hour contact center (Telephone
number 981-8888) and you can call them if you have any questions.
You may also e-mail them at contact_us@cctr.bir.gov.ph. You can also ask me
through the comments section and I will do my best to research the answer.
In my next posts, I will be discussing Value-Added Tax (VAT), expanded withholding

taxes (EWT) a.k.a. creditable withholding taxes (CWT)**, Real Property Taxes
(RPT), Transfer Taxes (TT), CGT on the sale of a principal residence, and estate
taxes (as I am sure many of you are also interested in transferring your properties to
your heirs in the future – remember, aside from taxes, death is certain too).
Let me know, through the comments section , if you have any other taxes you would
like to know about, or if there’s anything you would like to have any clarification on.
In closing, please remember that as an investor, one should always consider
the capital gains taxin real estate transactions. Failure to do so could mean your real
estate capital gains will just get eaten up by the corresponding capital gains tax and
turn what looked like a good deal into a bad one.
Creditable Withholding Tax In Real

Estate Transactions
Creditable withholding tax (CWT) is the tax which is withheld by the
buyer/withholding agent from his payment to the seller for the sale of the seller’s
ordinary asset/services, and which tax is creditable against the income tax payable
of the seller. I know this sounds confusing so let me tell you about the withholding
tax system first.
Disclaimer: While great effort has been taken to ensure the accuracy of the
discussion here as of its writing, this is not intended to replace seeking professional
services. Do read up on the relevant laws and regulations also.
Background on the Withholding Tax System

We all know that the ordinary income of a person/corporation is subject to regular
income tax. Under the withholding tax system, the government gives the buyer the
responsibility to withhold a certain percentage of his payment to the seller and remit
the same to the government. Thus, the amount remitted by the buyer to the seller is
less than the purchase price. The buyer should provide the seller with BIR Form No.
2307 (Certificate of Creditable Taxes Withheld) which states the amount of the taxes
he withheld.
The tax withheld is called the withholding tax and the buyer in this case is called a
withholding agent. Please note that this only applies to the ordinary income of the
seller, as opposed to his capital gain. Please refer to my earlier post on the
difference between ordinary assets and capital assets.
“What is the rationale for this system?”, you may ask.
To put it simply, the tax withheld by the buyer acts as the advanced payment of the
seller’s taxes. Since the seller will only pay income taxes on a quarterly basis, and
the government spends all throughout the year, it would be difficult for the
government to operate if it only gets income taxes quarterly. Also, since the buyer
withholds only a small percentage of the seller’s gross receipts (let’s say 2%), the
government is alerted that the seller realized income to the extent of the grossed-up
amount of the taxes withheld.
For example, P2,000.00 which pertains to 2% withholding tax means that the seller
sold P100,000.00 worth of assets/services for which he should pay income taxes.
When the time comes for the payment by the seller of his income taxes, and he
doesn’t declare the income from which the buyer withheld taxes, a discrepancy will
arise and the government will have a tip to investigate whether the seller is paying
the correct taxes.
Take note, the Bureau of Internal Revenue (BIR) already has computer software in
place which determines discrepancies automatically.
On the part of the buyer, he must withhold taxes, otherwise, he will not be able to
deduct his expense. For example, if his expense is P100,000.00 and he is required
to withhold 2% of this or P2,000.00 and he does not withhold and remit this amount,
for income tax computation purposes, he may not deduct his P100,000 expense
from his taxable income.
Thus, if his gross income is P200,000.00 and he may not deduct the P100,000.00
expense (assuming there are no other deductible expenses of course), he will pay
taxes based on a net income of P200,000.00 instead of P100,000.00.
On the part of the seller, since the taxes withheld act as his advanced payment of his
income tax, when the time comes for the quarterly payment of income taxes, he will
subtract the tax withheld from his income tax payable. For example, if his income tax
payable is P32,000.00 and the tax withheld from him is P2,000.00, then he will only
pay P30,000.00 income tax.
As proof of the taxes withheld, he should attach the BIR Form No. 2307 (Certificate
of Creditable Taxes Withheld) provided by the buyer to his income tax return.
Creditable Withholding Taxes On Real Estate Transactions

As earlier noted, this only applies to the sale of real estate which are ordinary assets
of the seller. Thus, when the real estate sold is a capital asset to the seller, his
income from the sale of real estate will be subject to capital gains tax, and no
creditable withholding tax shall be imposed on the transaction.
Please refer to my earlier post about ordinary assets vs. capital assets. From hereon
we will assume that we are talking about the sale of ordinary real estate assets.
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 real
6.0%
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 advance payment of income Exempt
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.
ADVERTISEMENT
Time and Place of Payment of Creditable Withholding Tax

A. General Rule
Section 4 of RR No. 004-08 dated February 19, 2008 provides for the time and place
of payment of creditable withholding tax and DST on the sale, exchange or other
mode of onerous disposition of real properties classified as ordinary assets.
Creditable withholding taxes deducted and withheld by the withholding agent/buyer

on the sale, transfer or exchange of real property classified as ordinary asset, shall
be paid by the withholding agent/buyer upon filing of the return with the Authorized
Agent Bank (AAB) located within the Revenue District Office (RDO) having
jurisdiction over the place where the property being transferred is located within ten
(10) days following the end of the month in which the transaction occurred.
The creditable withholding tax return is BIR Form 1606.
Taxes withheld in December shall be filed on or before January 15 of the following

year. Please note that this is subject to the rules prescribed by Electronic Filing and
Payment System (EFPS) regulations in case the taxpayer is an EFPS taxpayer.
Useful tip: You can find the AAB’s for each RDO in the BIR website. Just click on the
RDO number concerned.
Rules under Section 2.57.2 (J) of Revenue Regulations (RR) No.

2-98, as amended by RR No. 17-2003, in cases where the buyers
are engaged or not engaged in trade or business:
B. Buyer is not engaged in trade or business
1. Installment Sale
Under Section 2.57.2 (J) of Revenue Regulations (RR) No. 2-98, as amended by RR
No. 17-2003, if the sale is a sale of property on the installment plan (i.e., payments in
the year of sale do not exceed twenty five percent (25%) of the selling price), no
withholding is required to be made on the periodic installment payments.
In such a case, the applicable rate of tax based on the gross selling price or fair
market value of the property at the time of the execution of the contract to sell,
whichever is higher, shall be withheld on the last installment or installments
immediately prior to such last installment, if the last installment is not sufficient to
cover the tax due, to be paid to the seller until the tax is fully paid.
2. Cash Basis or Deferred Payment Sale Not on the Installment Plan

If the sale is on a “cash basis” or is a “deferred-payment sale not on the installment
plan” (that is, payments in the year of sale exceed 25% of the selling price), the
buyer shall withhold the tax based on the gross selling price or fair market value of
the property, whichever is higher, on the first installment.
C. Buyer is engaged in trade or business
1. Installment Sale
If the sale is a sale of property on the installment plan [i.e., payments in the year of
sale do not exceed twenty five percent (25%) of the selling price], the tax shall be
deducted and withheld by the buyer from every installment which tax shall be based
on the ratio of actual collection of the consideration against the agreed consideration
appearing in the Contract to Sell applied to the gross selling price or fair market
value of the property at the time of the execution of the Contract to Sell, whichever is
higher.
2. Cash Basis or Deferred Payment Sale Not on the Installment Plan

If the sale is on a “cash basis” or is a “deferred-payment sale not on the installment
plan” (that is, payments in the year of sale exceed 25% of the selling price), the
buyer shall withhold the tax based on the gross selling price or fair market value of
the property, whichever is higher, on the first installment.
In any case, no Certificate Authorizing Registration (CAR)/Tax Clearance Certificate

(TCL), shall be issued to the buyer unless the withholding tax due on the sale,
transfer, or exchange of real property has been fully paid.
For the sale of property on installment basis or deferred payment basis where the
Contract to Sell is always executed before the execution of the Deed of Sale, the
said Contract to Sell must be attached to the Deed of Absolute Sale executed upon
completion of the payments and the duly notarized original duplicate copy of both
documents must be presented to the RDO having jurisdiction of the place where the
property is located for validation of the correctness of issuance of CAR/TCL.
If upon completion of the payment of the purchase price of real property classified as
ordinary asset, but before the execution of the Deed of Sale, the buyer decides to
assign his right over the property to another person for a consideration, the
assignment shall be considered a separate sale of real property and, therefore,
subject to the creditable/expanded withholding tax (EWT) or final withholding of
capital gains tax, as the case may be, which shall be withheld by the assignee of
such property based on the consideration per Deed of Assignment or the fair market
value of such property at the time of assignment, whichever is higher, and to
the DST imposed under Sec. 196 of the same Code using the same basis.
It is to be clarified, however, that sale of interest in real property (real property

purchased on installment covered by Contract to Sell which was sold by the original
buyer before it was fully paid) shall be taxable on the part of the original buyer (now
seller) based on the realized gain thereon which is measured by the difference
between the agreed consideration and the amount actually paid by the said original
buyer.
Conclusion
As you may have noticed, there are many nuances to the CWT so I hope you’ll
understand the delay in the release of this post. Just post your questions, if any, in
the comments section so that my wife can research on them and I can get back to
you. If there’s a delay once again, please be patient as I can’t force my wife. The
more I tell her to do something, the more she doesn’t do
What you need to know about Value-
Added Tax (VAT) on the sale of Real
Estate
A lot of people have questions on taxes, including Value-Added Tax or VAT[1] on the
sale of Real Estate[2], so I will try my best to explain it as simply as I can.
The subject of taxes is quite technical so I apologize if my explanation may seem

quite hard to digest at times.
Why should we learn about taxes?

Why is it important to know whether the sale of a certain property is subject to VAT
andCreditable Withholding Tax (CWT), or Capital Gains Tax (CGT)? To put it simply,
if you pay the wrong tax, for example, CGT instead of VAT and CWT, you may be
liable for deficiency VAT and CWT plus penalties, and you would have to undergo a
long and difficult process to get a refund (Good luck in getting a refund!).
Aside from the very painful payment of a lot of taxes, there may be a delay in the r
elease of the Certificate Authorizing Registration (CAR) which you need in order for
the title to the property to be transferred to the name of the buyer.
In addition to the above, VAT should be considered in the pricing of real estate sold.
Note that compared to a capital asset subject to 6% CGT, an ordinary asset will be
subject to CWT of as high as 6% plus 12% VAT. Thus, VAT may make or break a
transaction, or lower the profit of the seller.
When is a sale of real property subject to VAT?
If the seller-taxpayer is a VAT-registered person, the sale of his ordinary asset shall
be subject to VAT.
A person should register as a VAT entity if his gross annual sales and/or receipts
exceed P1,919,500.00 in a year. If he is not originally registered as a VAT entity but
he exceeded the threshold, he should submit BIR Form No. 1905 (Taxpayer
Registration Update) to change to VAT.
When is an asset considered as ordinary? Ordinary assets are those which are:
1. Stock in trade of a taxpayer or other real 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
2. Real property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business; or
3. Real property used in trade or business (i.e., buildings and/or improvements) of a
character which is subject to the allowance for depreciation provided for under Sec.
34(F) of the Code; or
4. Real property used in trade or business of the taxpayer.
In simple terms, real property considered as ordinary assets are those which are
used in the trade or business of the taxpayer. Please read Revenue Regulations
(RR) No. 7-2003[3] in full to determine when an asset shall be considered as
capital or ordinary – this is also dependent on the classification of the
taxpayer.
I also wrote about the Creditable Withholding Tax (CWT)

here:http://www.foreclosurephilippines.com/2009/03/creditable-withholding-tax-in-
real.html and the Capital Gains Tax (CGT)
here: http://www.foreclosurephilippines.com/2009/02/real-estate-taxation-what-is-
capital.html, you may read the said posts should you wish to learn more about them.
VAT Taxpayer
The VAT taxpayer in this case is a person who is engaged in the real estate
business and is the seller of a real property classified as an ordinary asset.
Taxpayers engaged in the real estate business shall refer collectively to real estate
dealers, real estate developers, and/or real estate lessors. A taxpayer whose primary
purpose of engaging in business, or whose Articles of Incorporation states that its
primary purpose is to engage in the real estate business shall also be deemed to be
engaged in the real estate business.
How about those not in the above list? Registration with the HLURB or HUDCC as a
real estate dealer or developer shall be sufficient for a taxpayer to be considered as
habitually engaged in the sale of real estate. If the taxpayer is not registered with the
HLURB or HUDCC as a real estate dealer or developer, he/it may nevertheless be
deemed to be engaged in the real estate business through the establishment of
substantial relevant evidence (such as consummation during the preceding year of at
least six (6) taxable real estate sale transactions, regardless of amount; registration
as habitually engaged in real estate business with the Local Government Unit or the
Bureau of Internal Revenue (BIR), etc.).
Many ask how are the six taxable real estate sale transactions counted. According to
our real estate mentor, when you buy a property and later sell it, those are counted
as two transactions. I believe this is the conservative position. It will actually depend
on the BIR officer processing your papers. Technically, and as written, it says six
“sale” transactions.
A person who is not engaged in the real estate business but who is selling real
property which is classified as its ordinary asset is also subject to VAT. This is
pursuant to RR No. 4-07 which provides:
“However, even if the real property is not primarily held for sale to customers or held
for lease in the ordinary course of trade or business but the same is used in the trade
or business of the seller, the sale thereof shall be subject to VAT being a transaction
incidental to the taxpayer’s main business.”
Thus, if a taxpayer is engaged in the restaurant business and sells his restaurant
building which he used in his restaurant business, the said sale shall be subject to
VAT, notwithstanding that the taxpayer is not engaged in the real estate business.
Please note thank banks are not considered as VAT taxpayers. Thus, their sale of
foreclosed properties are not subject to VAT. They are subject instead to Creditable
Withholding tax (CWT). Their foreclosed assets, when sold, are considered as
ordinary assets but banks are not considered as engaged in the real estate
business.
VAT rate
The sale of properties which may be considered as ordinary assets would be subject
to the 12%[4] VAT effective February 1, 2006.
Tax base of output VAT

The tax base of the 12% output VAT is the selling price (SP) or the fair market value
(FMV) of the property whichever is higher.
If VAT is not billed separately in the document of sale, the selling price stated in the
deed isdeemed inclusive of VAT. Thus, to get the selling price without VAT, divide
the selling price in the deed by 1.12. To get the VAT, multiply the selling price
without VAT by .12.
What if the gross selling price in the document of sale is equal to the zonal value or
market value of the property? Will the selling price without VAT be effectively lower
than the zonal or market value of the property? No, the zonal/market value shall be
considered as net of the output VAT.[5]
Please note that the VAT should be separately indicated in the document of sale and
official receipt as there are penalties for non-compliance.[6]
VAT payable
The amount of VAT payable is the difference between the output VAT and input
VAT. Keep the VAT-registered official receipts (for services purchased) and invoices
(for goods purchased) supporting your business expenses so you can claim input
VAT which can reduce your output VAT payable.
Time of payment of VAT

The time of payment will depend on whether a sale is an Installment Sale or a
Deferred Payment Sale. A sale is on installment if the initial payments in the year of
sale do not exceed 25% of the gross selling price. A sale is considered as cash or
deferred payment if the initial payments in the year of sale exceed 25% of the gross
selling price. [7]
ADVERTISEMENT
Initial payments means payment or payments which the seller receives before or
upon execution of the instrument of sale and payments which he expects or is
scheduled to receive in cash or property (other than evidence of indebtedness of the
purchaser) during the taxable year when the sale or disposition of the real property
was made. It covers any downpayment made and includes all payments actually or
constructively received during the year of sale, the aggregate of which determines
the limit set by the law.
In other words, add the downpayment plus all amortization payments (principal
portion only) during the year and compute if the total exceeds 25% of the gross
selling price.
A. Deferred payment/Cash basis
 The transaction shall be treated as a cash sale which makes the entire selling price
subject to VAT in the month of sale.
B. Installment basis
 Each installment payment actually and/or constructively received by the seller is subject
to VAT.
The monthly VAT return should be filed on or before the 20 th day of the month
following the close of the 1st two months of the quarter (February 20, March 20, May
20, June 20, August 20, September 20, November 20, December 20) while the
quarterly VAT return should be filed on or before the 25 th day of the month following
the last month of the quarter (April 25, July 25, October 25, January 25).
Place of payment
The VAT should be paid at the Authorized Agent Bank (AAB) of the Revenue District
Office (RDO)where the seller is registered as a taxpayer. In places where there
are no AAB, the return shall be filed directly with the Revenue Collection Officer or
Authorized City or Municipal Treasurer.
BIR Form to use

The monthly VAT return is BIR Form No. 2550M,[8] while the quarterly VAT return is
BIR Form No. 2550Q[9]
Exemptions from VAT

The following are exempt from VAT:
 Sale of residential lot not exceeding P1,919,500.00 (effective January 1, 2012, as per
RR No. 16-2011[10]). If two or more adjacent 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 does not exceed P1,919,500.00
(effective January 1, 2012, as per RR No. 16-2011[11]).
In practice, I have heard of cases where adjacent condominium units are bought but
the selling prices are not aggregated for purposes of computing whether the sale
exceeds the threshold. I believe that the reasoning made is that adjacent
condominium units are not the same as adjacent residential lots and thus, the rule on
adjacent residential lots does not apply. This is the aggressive position. [Edit: RR 13-
2012 clarified the rules on adjacent units.]
 Sale of real properties not primarily held for sale to customers or held for lease in the
ordinary course of trade or business (in other words, a capital asset);
 Sale of real property utilized for low-cost ( i.e. P750,000.00) and socialized housing ( i.e.
P400,000) as defined by Republic Act No. 7279 or the Urban Development and Housing
Act of 1992;
 Sale of residential house and lot not exceeding P3,199,200.00 (effective January 1,
2012, as per RR No. 16-2011[12]). In practice, condominiums use this amount as the
VAT threshold.
I wrote about the increase in the VAT threshold effective January 1, 2012
here:http://www.foreclosurephilippines.com/2011/11/threshold-for-vat-exemptions-to-
be-increased-effective-january-1-2012.html. RR 3-2012 clarified that the increased
thresholds shall apply to those sales whose supporting instruments were executed or
notarized on or after January 2,
2012 ftp://ftp.bir.gov.ph/webadmin1/pdf/62308RR%203-2012.pdf.
I hope somehow this post helps you in understanding VAT on the sale of real estate.
I shall discuss VAT on the lease of real estate in a separate post. If you are
knowledgeable on the topic and I have discussed something erroneously, I would
appreciate it if you could assist me in correcting it.
Please note that VAT on real estate is a very broad topic in itself so this is already an
abridged discussion. I strongly recommend that you read the rulings cited as it is
highly possible that the answers to your questions may be found there.
Feedback and comments are highly appreciated. Let me know what you think, or
what you want to know, by leaving a comment below, and don’t forget to subscribe to
get notified when we publish new articles about real estate taxation. Thank you!
Happy investing!
~~~
To our success and financial freedom!
Cherry Vi M. Saldua-Castillo
Real Estate Broker, Lawyer, and CPA
PRC Real Estate Broker License No. 3187
PRC CPA License No. 0102054
Roll of Attorneys No. 55239
Text by Jay Castillo and Cherry Castillo. Copyright © 2011 All rights reserved.
Full disclosure: Nothing to disclose.
______________________________________________________________
References:
[1] The BIR website has a summary on VAT

at http://www.bir.gov.ph/taxinfo/tax_vat.htm
[2] This article is for general information only and is not a substitute for professional
advice where the facts and circumstances warrant. While every effort has been used
to ensure the accuracy of the information provided, the author disclaims any liability
from the direct or indirect use of this material.
[3] You may download RR No. 7-2003

from ftp://ftp.bir.gov.ph/webadmin1/pdf/1344rr07_03.pdf
[4] Section 106 of the Tax Code, as amended by R.A. No. 9337 dated May 24, 2005
[5] RR No. 4-2007
[6] You may download RR 18-2011

at ftp://ftp.bir.gov.ph/webadmin1/pdf/61128RR%2018-2011.pdf
[7] SEC. 4.105-2, Revenue Regulations (RR) No. 16-

2005 ftp://ftp.bir.gov.ph/webadmin1/pdf/26116rr16-2005.pdf, as amended by RR No.
4-2007 ftp://ftp.bir.gov.ph/webadmin1/pdf/33868rr%20no.%204-2007.pdf
[8] http://www.bir.gov.ph/birforms/form_per.htm
[9] http://www.bir.gov.ph/birforms/form_per.htm.
[10] You may download a copy of RR No. 16-2011



-------------------------------------------------------------------------------------\
More On Documentary Stamp Tax

(DST) On Real Estate Transactions
There are different DST rates on different types of transactions. In my previous post
on How to Easily Compute DST, I was referring to DST on the sale of real property.
Please note that there is DST too on loan agreements, lease agreements, and
mortgages, and there are also exemptions from DST. For this post, aside from
discussing these, I will also discuss the deadline date and venue for filing the DST
return.
I will provide you as well with a blank DST form for your use and reference. Take
note that most of this post was actually written by my wife.
DST on the sale of real property

Section 196 of the Tax Code, as amended, provides:
“SEC. 196. Stamp Tax on Deeds of Sale and Conveyances of Real Property. — On all
conveyances, deeds, instruments, or writings, other than grants, patents or original certificates
of adjudication issued by the Government, whereby any land, tenement or other realty sold
shall be granted, assigned, transferred or otherwise conveyed to the purchaser, or purchasers,
or to any other person or persons designated by such purchaser or purchasers, there shall be
collected a documentary stamp tax, at the rates herein below prescribed, based on the
consideration contracted to be paid for such realty or on its fair market value determined in
accordance with Section 6(E) of this Code, whichever is higher: Provided, That when one of
the contracting parties is the Government, the tax herein imposed shall be based on the actual
consideration:
(a) When the consideration, or value received or contracted to be paid for such
realty, after making proper allowance of any encumbrance, does not exceed One
thousand pesos (P1,000), Fifteen pesos (P15.00).
(b) For each additional One thousand pesos (P1,000), or fractional part thereof in
excess of One thousand pesos (P1,000) of such consideration or value, Fifteen
pesos (P15.00).
When it appears that the amount of the documentary stamp tax payable hereunder
has been reduced by an incorrect statement of the consideration in any conveyance,
deed, instrument or writing subject to such tax the Commissioner, provincial or city
Treasurer, or other revenue officer shall, from the assessment rolls or other reliable
source of information, assess the property of its true market value and collect the
proper tax thereon.”
To compute the DST, divide the higher amount between the selling price and the fair market
value by P1,000.00, then round off the amount to next higher number if there are decimals,
then multiply it by P15.00. As a shortcut, multiply the higher amount between the selling price
and the fair market value by .015 and if the DST is not a multiple of 15, the DST shall be the
next higher multiple of 15.
Take note that if the tax base is incorrect (for example, the selling price or the zonal
value is understated to lower the DST), the true value of the property may be
assessed so that the proper tax may be collected. Please refer to my previous post
on How to Easily Compute DST as to the sample computations.
DST on loan agreements
If you will be taking out a loan, another type of DST may be imposed. Section 179 of the Tax
Code, as amended, provides for the DST on loan agreements, as follows:
“SEC. 179. Stamp Tax on All Debt Instruments. — On every original issue of debt
instruments, there shall be collected a documentary stamp tax on One peso (P1.00)
on each Two hundred pesos (P200), or fractional part thereof, of the issue price of any
such debt instruments: Provided, That for such debt instruments with terms of less
than one (1) year, the documentary stamp tax to be collected shall be of a proportional
amount in accordance with the ratio of its term in number of days to three hundred
sixty-five (365) days: Provided, further, That only one documentary stamp tax shall be
imposed on either loan agreement, or promissory notes issued to secure such loan.
For purposes of this section, the term debt instrument shall mean instruments
representing borrowing and lending transactions including but not limited to
debentures, certificates of indebtedness, due bills, bonds, loan agreements,
including those signed abroad wherein the object of contract is located or used in the
Philippines, instruments and securities issued by the government of any of its
instrumentalities, deposit substitute debt instruments, certificates or other evidences
of deposits that are either drawing interest significantly higher than the regular
savings deposit taking into consideration the size of the deposit and the risks
involved or drawing interest and having a specific maturity date, orders for payment
of any sum of money otherwise than at sight or on demand, promissory notes,
whether negotiable or non-negotiable, except bank notes issued for circulation.”
DST on loan agreements (which may be taken out in order to purchase real property ) is thus
computed as P1.00 for every P200.00. To compute the DST, divide the loan amount by
P200.00, then round off the amount to next higher number if there are decimals. As a shortcut,
multiply the loan amount by .005 and round off the amount to next higher number if there are
decimals.
DST on lease agreements

If you will be leasing out your property, DST will be imposed at the rate of P3.00 for
the first P2,000.00 and an additional P1.00 for every P1,000.00 in excess of the first
P2,000.00 pursuant to Section 194 of the Tax Code, to wit:
“Section 194. Stamp tax on Leases and Other Hiring Agreements. – On each lease,
agreement, memorandum, or contract for hire, use or rent of any lands or tenements,
or portions thereof, there shall be collected a documentary stamp tax of Three pesos
(P3.00) for the first Two thousand pesos (P2,000), or fractional part thereof, and an
additional One peso (P1.00) for every One Thousand pesos (P1,000) or fractional
part thereof, in excess of the first Two thousand pesos (P2,000) for each year of the
term of said contract or agreement.”
To compute DST, multiply the monthly rent by 12 months and then by the number of
years stated in the contract. Subtract P2,000.00 and multiply the amount by .001,
then add P3.00.
ADVERTISEMENT
For example, the monthly rent is P10,000.00, and the contract is for 3 years. The
DST is computed as follows:
Monthly rent P10,000.00

Multiply by 12 months
Annual rent = P120,000.00
Multiply by 3 years
Total contract amount = P360,000.00
Subtract P2,000 = P358,000.00
Multiply this by .001 = P358
Plus P3.00
DST = P361.00
As a shortcut, multiply the contract amount by .001 and add P1.00 to get the DST.
If the total contract amount is not a multiple of P1,000.00, for example, it’s
P360,500.00, round it up to the next 1,000 then multiply the contract amount by .001
and add P1.00 to get the DST.
DST on mortgages
Section 195 of the Tax Code provides:
“Section 195. Stamp Tax on Mortgages, Pledges and Deeds of Trust. – On every
mortgage or pledge of lands, estate, or property, real or personal, heritable or
movable, whatsoever, where the same shall be made as a security for the payment
of any definite and certain sum of money lent at the time or previously due and owing
of forborne to be paid, being payable and on any conveyance of land, e
state, or property whatsoever, in trust or to be sold, or otherwise converted into
money which shall be and intended only as security, either by express stipulation or
otherwise, there shall be collected a documentary stamp tax at the following rates:
(a) When the amount secured does not exceed Five thousand pesos (P5,000),
Twenty pesos (P20.00).
(b) On each Five thousand pesos (P5,000), or fractional part thereof in excess of
Five thousand pesos (P5,000), an additional tax of Ten pesos (P10.00).
On any mortgage, pledge, or deed of trust, where the same shall be made as a
security for the payment of a fluctuating account or future advances without fixed
limit, the documentary stamp tax on such mortgage, pledge or deed of trust shall be
computed on the amount actually loaned or given at the time of the execution of the
mortgage, pledge or deed of trust, additional documentary stamp tax shall be paid
which shall be computed on the basis of the amount advanced or loaned at the rates
specified above: Provided, however, That if the full amount of the loan or credit,
granted under the mortgage, pledge or deed of trust shall be computed on the
amount actually loaned or given at the time of the execution of the mortgage, pledge
or deed of trust. However, if subsequent advances are made on such mortgage,
pledge or deed of trust, additional documentary stamp tax shall be paid which shall
be computed on the basis of the amount advanced or loaned at the rates specified
above: Provided, however, That if the full amount of the loan or credit, granted under
the mortgage, pledge or deed of trust is specified in such mortgage, pledge or deed
of trust, the documentary stamp tax prescribed in this Section shall be paid and
computed on the full amount of the loan or credit granted.”
To compute DST, subtract P5,000 from the contract amount, then divide what’s left
by P5,000.00 and round off any decimal to the higher number. Multiply this by 10
then add P20.00.
To illustrate, if the amount secured is P106,000.00, the DST is computed as follows:
Amount secured P106,000.00

Subtract P5,000 = 101,000
Divide by P5,000.00 = 20.20
Round off to higher number = 21
Multiply by 10 = 210
Add 20 = P230 DST
As a shortcut, divide the contract amount by P5,000.00 and round off any decimal to
the higher number. Multiply this by 10 then add P10.00.
Exemptions from DST

Section 199 of the Tax Code, as amended, provides the documents which are exempt from
DST, including loan agreements which does not exceed P250,000, viz:
“(d) Loan agreements or promissory notes, the aggregate of which does not exceed Two
hundred fifty thousand pesos (P250,000), or any such amount as may be determined by the
Secretary of Finance, executed by an individual for his purchase on installment for his personal
use or that of his family and not for business or resale, barter or hire of a house, lot, motor
vehicle, appliance or furniture: Provided, however, That the amount to be set by the Secretary
of Finance shall be in accordance with a relevant price index but not to exceed ten percent
(10%) of the current amount and shall remain in force at least for three (3) years.”
Deadline for filing the DST return
Under Revenue Regulations (RR) No. 5-2009 dated March 16, 2009, the DST Return (BIR
Form No. 2000-OT) shall be filed within five (5) days after the close of the month when the
taxable document was made, signed, accepted or transferred. For example, the DST on a
taxable document signed on April 15, 2009 will be due on May 5, 2009.
Venue for filing the DST return
The DST due shall be paid at the same time the aforesaid return is filed with the AAB having
jurisdiction over the place where the property being transferred is located based on the
consideration contracted to be paid for such realty or on its fair market value determined in
accordance with Section 6(E) of the Tax Code, whichever is higher.
Please feel free to leave a comment below. Alternatively, you may also visit
our forum and social networking site for real estate investors to post questions and
discuss about real estate taxation and a whole lot of other stuff.
What is Transfer Tax?

A transfer tax is imposed on tax on the sale, donation, barter, or any other mode of
transferring ownership or title of real property at the maximum rate of 50% of 1% (75%
of 1% in the case of cities and municipalities within Metro Manila) of the total
consideration involved in the acquisition of the property or of the fair market value in
case the monetary consideration involved in the transfer is not substantial, whichever
is higher. This is pursuant to Section 135 of the Local Government Code of 1991
(LGC).
You need to pay the transfer tax because the evidence of its payment is required by
the Register of Deeds of the province concerned before registering any deed. This is
also required by the provincial assessor before cancelling an old tax declaration and
issuing a new one in its place.Please do not confuse the transfer tax which is paid
to the local government with the transfer taxes due to the BIR (which may either
be donor’s or estate taxes).
Disclaimer: While great effort has been taken to ensure the accuracy of the discussion
here as of its writing, this is not intended to replace seeking professional services.
Always consult with your tax attorneys and read up on the relevant laws and
regulations also.
Who should pay

The payment of the transfer tax is the responsibility of the seller, donor, transferor,
executor or and administrator.
When to pay
The deadline for payment is sixty (60) days from the date of the execution of the deed
or from the date of the decedent’s death. Please note too that notaries public are
required to furnish the provincial treasurers with a copy of any deed transferring
ownership or title to any real property within thirty (30) days from the date of
notarization.
Surcharges and penalties for late payments (as per section 168 of RA 7160)
 Surcharge – No more than twenty-five percent (25%) of the amount of taxes, fees or
charges not paid on time
 Penalty – No more than two percent (2%) per month of the unpaid taxes, fees or
charges including surcharges, until such amount is fully paid, but in not to exceed thirty-
six (36) months or seventy-two percent (72%).
Where to pay
The transfer tax is to be paid at the Treasurer’s Office of the city or municipality where
the property is located.
Requirements
In general, the requirements for the payment of transfer tax are the following:
 Certificate Authorizing Registration from the Bureau of Internal Revenue;

 Realty tax clearance from the Treasurer’s Office; and
 Official receipt of the Bureau of Internal Revenue (for documentary stamp tax).
Transfer Tax Rates
With regard to the transfer tax rates, please click on the links to see the different
transfer tax rates and documents required to transfer the registration of a property.
You have to check the rates on a per city or per municipality basis as the LGC only
provides for the maximum rates. Click on the links below for the transfer tax rates of
major cities.
 Manila
 Caloocan – [I have no idea why the transfer tax rate in Caloocan is 82.5% of 1%]
 Cebu
 Davao
 Las Pinas
 Makati
 Mandaluyong
 Marikina
 Pasig
 Quezon City
The http://www.doingbusiness.org site is so cool. You can learn about the
requirements for registering property, etc., with cost and estimated time to complete.
Transfer Tax Base

In the case Romulo D. San Juan vs. Ricardo L. Castro, in his capacity as City
Treasurer of Marikina City [G.R. No. 174617 dated December 27, 2007], one of the
issues was the proper computation of the transfer tax base. In this case, petitioner San
Juan conveyed real properties to a corporation in exchange for its shares of
stock[1]. Using as basis Section 135 of the LGC, San Juan wanted to pay the transfer
tax based on the consideration stated in the Deed of Assignment. Respondent Castro,
as the Treasurer, informed him that the tax due is based on the fair market value of
the property. Petitioner Castro protested the Treasurer’s computation in writing, which
the Treasurer also denied in writing. Petitioner Castro then filed a Petition for
mandamus and damages against the Treasurer praying that he be compelled to
accept payment of the transfer tax based on the actual consideration of the
transfer/assignment.
The bone of contention was the proper interpretation of Section 135 of the LGC which
provides:
“SECTION 135. Tax on Transfer of Real Property Ownership. (a) The province may
impose a tax on the sale, donation, barter, or on any other mode of transferring
ownership or title of real property at the rate of not more than fifty percent (50%) of the
one percent (1%) of the total consideration involved in the acquisition of the property
or of the fair market value in case the monetary consideration involved in the transfer
is not substantial, whichever is higher. The sale, transfer or other disposition of real
property pursuant to R.A. No. 6657[2] shall be exempt from this tax. xxx”
Petitioner San Juan took the position that the transfer tax base should be the total
consideration involved, because the intention of the law is not to automatically apply
the “whichever is higher” rule. He argued that it is only when there is a monetary
consideration involved and the monetary consideration is not substantial that the tax
rate is based on the higher fair market value. His argument was that since he received
shares of stock in exchange for the real properties, there was no monetary
consideration involved in the transfer.
ADVERTISEMENT
Respondent Castro, on the other hand, took the position that the transfer tax base
should be the fair market value, because it is higher than the “monetary consideration”
San Juan received in exchange for his real properties. Castro argued that “monetary
consideration” as used in the LGC does not only pertain to the price or money involved
but also, as in the case of donations or barters, to the value or monetary equivalent of
what is received by the transferor, which, in this case, Castro argued to be the par
value of the shares of stock San Juan transferred in exchange for shares of stock.
As anticlimactic as this may sound, the Court did not rule squarely on the correct
computation of the transfer tax base because it held that a Petition for Mandamus was
not the correct remedy. Mandamus lies only to compel an officer to perform a
ministerial duty (one which is so clear and specific as to leave no room for the exercise
of discretion in its performance) but not a discretionary function (one which by its
nature requires the exercise of judgment).
Sample Computation
Considering that there is still an issue as to the proper computation of the transfer tax
base, I suggest that we not delve into the various interpretations of Section 135 of the
LGC and simply multiply the transfer tax rate by the higher amount between the
consideration paid and the fair market value.
Let’s take for example a residential condominium in Antipolo with a floor area of 50sqm
and a Selling Price (SP) of Php2.0M. The existing market value as per Tax Declaration
is currently at Php 1M.
Since SP is higher than the Market Value, we shall use SP to compute the transfer
tax:
Antipolo City Transfer Tax Rate: 0.75% [that is, 75% of 1%]
Transfer Tax = 0.75% x 2,000,000 = Php15,000
What if you don’t agree with the Treasurer’s computation?

Assuming you disagree with the tax assessment made by a local treasurer, you may
file a written protest thereof pursuant to Section 195 of the LGC, which provides:
“SECTION 195. Protest of Assessment. — When the local treasurer or his duly
authorized representative finds that the correct taxes, fees, or charges have not been
paid, he shall issue a notice of assessment stating the nature of the tax, fee, or charge,
the amount of deficiency, the surcharges, interests and penalties. Within sixty (60)
days from the receipt of the notice of assessment, the taxpayer may file a written
protest with the local treasurer contesting the assessment; otherwise, the assessment
shall become final and executory. The local treasurer shall decide the protest within
sixty (60) days from the time of its filing. If the local treasurer finds the protest to be
wholly or partly meritorious, he shall issue a notice cancelling wholly or partially the
assessment. However, if the local treasurer finds the assessment to be wholly or partly
correct, he shall deny the protest wholly or partly with notice to the taxpayer. The
taxpayer shall have thirty (30) days from the receipt of the denial of the protest or from
the lapse of the sixty-day (60) period prescribed herein within which to appeal with the
court of competent jurisdiction, otherwise the assessment becomes conclusive and
unappealable.”
In the case earlier discussed, the Petitioner protested in writing against the
assessment and Respondent denied it in writing as well. Petitioner should thus have
either: 1) appealed the assessment before the court of competent jurisdiction, or 2)
paid the tax and then sought a refund.
In my view, the Petitioner San Juan could have made another argument, that is,
assuming that the “monetary consideration” would be equivalent to the par value of
the stocks (which is still lower than the fair market value), that value is substantial and
thus, there is no need for the “whichever is higher” provision to kick in. Anyway,
hopefully this issue would be decided upon squarely soon as there are really a lot of
tax-free exchanges occurring and we really need guidance on the computation of
transfer tax. Perhaps one day a taxpayer and his tax attorneys may decide to bring
this issue up until the Supreme Court for a final decision.
Taking everything into consideration, personally, unless the difference in tax that you
need to pay is really significant, it would be better to follow the computation of the
Treasurer. Filing a case in court would require filing fees and fees for tax attorneys,
not to mention taking up much of your time. If you will not pay the transfer taxes, you
cannot transfer the title to your name and this would lead to problems with your buyer
and the closing of your sale transaction. Weigh your options first before heading to
battle. In real estate, as in everything, closing the deal fast is key.
[1] We will discuss the mechanics of a tax-free exchange in a later post
[2] Comprehensive Agrarian Reform Program
What You Need to Know About Real

Property Tax (RPT)
Real Property Tax (RPT) is a tax that owners of real property need to pay every year
so that the local government unit (LGU) will not auction off their property.
There are some investors who buy tax-delinquent real properties and participate in
auctions held by LGU’s, and this is one of the ways one can buy properties at low
prices. We also publish schedules and lists of tax-delinquent real properties of
different cities – they are classified under the category tax-delinquent properties.
At A Glance... [hide]
 1 What is Real Property Tax?
 2 Who should pay the RPT
 3 Where to pay
 4 When to pay
 5 How do you compute real property tax (RPT)?
 6 What are the RPT rates?
o 6.1 Maximum RPT rates:
o 6.2 Special Education Fund (SEF) – 1%
o 6.3 Ad Valorem Tax on Idle Lands – 5%
 7 How do you compute the Assessed Value?
 8 Maximum Assessment Level rates
 9 Sample Computation
 10 Special Classes of Real Property
o 10.1 What are the assessment levels for special classes of real property?
 11 What are Idle Lands?
o
 11.0.1 Cherry Vi M. Saldua-Castillo
In the past, we have discussed what happens during these LGU auctions. You may want to
read them should you be interested in this type of investment:
 Marikina Public Auction of Tax-Delinquent Real Properties (one of our very first posts)
 Four tips for investors who plan to invest in tax-delinquent real properties in Quezon
City
 9 lessons learned from the real property tax foreclosure auction sale in Quezon City
In this post, I will discuss the legal bases for RPT and how to compute it.
What is Real Property Tax?

Real Property Tax is the tax on real property imposed by the Local Government Unit
(LGU). The legal basis is Title II of the Local Government Code (LGC), Republic Act
(R.A.) no. 7160. The implementing rules and regulations of R. A. 7160 can be
found here.
The RPT for any year shall accrue on the first day of January and from that date it
shall constitute a lien on the property which shall be superior to any other lien,
mortgage, or encumbrance of any kind whatever, and shall be extinguished only
upon payment of the delinquent tax.
If you have prior years’ delinquencies, interests, and penalties, your RPT payment
shall first be applied to them. Once they are settled, your tax payment may be
credited for the current period.
Who should pay the RPT

The owner or administrator of the property
Where to pay
At the City or municipal treasurer’s office
When to pay
If you choose to pay for one whole year, the payment is due on or before January
31. If the basic RPT and the additional tax accruing to the Special Education Fund
(SEF) are paid in advance, the sanggunian concerned may grant a discount not
exceeding twenty percent (20%) of the annual tax due. Jay wrote about the discount
on RPT recently in his post How To Get A 20% Discount on Real Property Taxes.
If you choose to pay in installments, the four quarterly installments shall be due on or
before the last day of each quarter, namely: March 31, June 30, September 30, and
December 31.
In case of failure to pay the basic RPT and other taxes when due, the interest at the
rate of two percent (2%) per month shall be imposed on the unpaid amount, until
fully paid. The maximum number of months is thirty-six (36) months, so effectively,
the maximum interest rate is seventy-two percent (72%).
How do you compute real property tax (RPT)?

RPT = RPT Rate x Assessed Value
What are the RPT rates?

Maximum RPT rates:
Coverage RPT rate
Cities and Municipalities within Metro Manila 2%
Provinces 1%
Special Education Fund (SEF) – 1%

In addition to the basic RPT, the LGU’s may levy and collect an annual tax of one
percent (1%) which shall accrued exclusively to the Special Education Fund (SEF).
Ad Valorem Tax on Idle Lands – 5%

In addition to the basic RPT, the LGU’s may collect a maximum idle land tax is 5%
assessed value of the property.
How do you compute the Assessed Value?
Assessed Value = Fair Market Value x Assessment
Level
Sec. 199 (l) of the LGC defines “Fair Market Value” as the price at which a property
may be sold by a seller who is not compelled to sell and bought by a buyer who is
not compelled to buy. In practice, however, the Fair Market Value is based on the
assessment of the municipal or city assessor as written in the Tax Declaration.
The Assessment Level shall be fixed through ordinances of the Sangguniang

Panlalawigan, Sangguniang Panglungsod, or the Sangguniang Pambayan of the
municipality within the Metro Manila area. To get this data, look for the tax Ordinance
of the city or municipality where your property is located.
Maximum Assessment Level rates

I. Land
Class Assessment Level
Residential 20%
Timberland 20%
Agricultural 40%
Commercial 50%
Industrial 50%
Mineral 50%
II. Building and Other Structures
1. Residential
FMV Over But Not Over Assessment Level
0.00 175,000.00 0%
175,000.00 300,000.00 10%
300,000.00 500,000.00 20%
500,000.00 750,000.00 25%
750,000.00 1,000,000.00 30%
1,000,000.00 2,000,000.00 35%
2,000,000.00 5,000,000.00 40%
5,000,000.00 10,000,000.00 50%
10,000,000.00 60%
2. Agricultural
300,000.00 25%
300,000.00 500,000.00 30%
500,000.00 750,000.00 35%
750,000.00 1,000,000.00 40%
1,000,000.00 2,000,000.00 45%
2,000,000.00 50%
ADVERTISEMENT
3. Commercial/Industrial
300,000.00 30%
300,000.00 500,000.00 35%
500,000.00 750,000.00 40%
750,000.00 1,000,000.00 50%
1,000,000.00 2,000,000.00 60%
2,000,000.00 5,000,000.00 70%
5,000,000.00 10,000,000.00 75%
10,000,000.00 80%
4. Timberland
300,000.00 45%
300,000.00 500,000.00 50%
500,000.00 750,000.00 55%
750,000.00 1,000,000.00 60%
1,000,000.00 2,000,000.00 65%
2,000,000.00 70%
–
II. Machineries
Class Assessment Level
Agricultural 40%
Residential 50%
Commercial 80%
Industrial 80%
Sample Computation
Data:
Actual use of property: Residential
Location: City within Metro Manila
FMV per assessor’s officer (based on Tax Declaration):
Land – P350,000
Improvement – P350,000
Assessment Level for Land: 20%
Assessment Level for Improvement: 20%
Note: The assessment levels are fixed through ordinances of the Sangguniang
Panlalawigan, Sangguniang Panglungsod, or the Sangguniang Pambayan of the
municipality within the Metro Manila area. We will be using the maximum rates for
sample computation purposes.
Computation
Assessed Value of Land = P350,000 x 20% = P70,000

Assessed Value of Improvement = P350,000 x 20% = P70,000
Basic Real Property Tax for Land and Improvement
= (P70,000 + P70,000) x 2% = P2,800
Special Education Fund (SEF) for Land and Improvement = (P70,000 + P70,000)
x 1% = P1,400
Special Classes of Real Property
All lands, buildings, and other improvements thereon actually, directly and
exclusively used for hospitals, cultural, or scientific purposes, and those owned and
used by local water districts, and government-owned or controlled corporations
rendering essential public services in the supply and distribution of water and/or
generation and transmission of electric power
What are the assessment levels for special classes of real property?
Actual Use Assessment

Level
Cultural 15%
Scientific 15%
Hospital 15%
Local water districts 10%
Government-owned or controlled corporations 10%

engaged in the supply and distribution of water
and/or generation and transmission of electric
power
What are Idle Lands?
1. Agricultural lands more than one (1) hectare in area, suitable for cultivation,
dairying, inland fishery, and other agricultural uses, ½ of which remain uncultivated
or unimproved.
 Exceptions
i. Lands planted to permanent or perennial crops with at least 50 trees to a
hectare; and
ii. Lands used for grazing purposes (Note: put goats or cows on your
property).
2. Lands Other than Agricultural, located in a city or municipality, more than 1,000
sqm. in area, ½ of which remain unutilized or unimproved
3. Residential lots in subdivisions, regardless of land area
~~~
Aside from real property owners, I hope this also helps those studying for the 2013
real estate brokers exam. Do you have any questions, comments or reactions? Just
let me know by leaving a comment below, thanks!
~~~
Donation As An Estate Planning Tool

(A Discussion on Donor’s Tax)
The donation of properties can be used as a tool for estate planning. One just
needs to be aware that donations are subject to donor’s tax. Read this to find out
how much donor’s tax you need to pay when donating a property as part of estate
planning.
Real property, just like any other material possession, may not be brought to the
afterlife. You need to transfer property sooner or later. Usually, however, the transfer
of property prior to death is a taboo subject so many end up dealing with property
transfer problems only after a person has died. It is always good to be prepared
since we will all surely die – there is simply no escaping it, so might as well prepare
for the inevitable.
Donation of properties are subject to donor’s tax
Why donate your properties prior to death?
Donation may be considered as an estate planning tool because you are able to
transfer your properties prior to death little by little every year and therefore you can
take advantage of the graduated donor’s tax rates. If you have a lot of properties at
the time of death, the estate tax* would be higher because the total amount of the
properties will probably fall under a higher tax range
*If you want to learn more about estate tax (the tax that needs to be paid after death)
read this:Death, Real Estate, and Estate Tax
On another note, it is usually the case that the family spends a lot for medical care
prior to death, and because of this, the family’s cash reserves are depleted. If the
family is not liquid and they need to pay the estate tax within six months from the
time of death, many times the family is forced to sell their properties below market
value because they are under time pressure. It is during these pressure points that
many investors are able to buy good properties at a good price. I don’t want to view it
as taking advantage of the misfortune of others – rather, I want to think of it as the
investors helping the family solve their cash problem. If no one bought the property,
the family would be in a worse situation.
Another problem that may arise upon death is that the children or heirs will be
fighting each other for their “rightful” share of the deceased’s property. I don’t think
any parent would want their loved ones to be fighting over money or property. If the
properties are already distributed as agreed upon by all parties prior to death, then
this problem may be alleviated.
Lastly, I believe that a person who already thought in advance of the transfer of
properties prior to death, and actually had no more significant properties to transfer
upon death, would be at peace upon death because he/she did not leave problems
to his/her family. Dealing with grief is hard enough, it would be difficult to deal with
the nitty-gritty taxes and what-not during a most stressful time.
Of course, there are downsides to donation too – Who shall control the properties?
Who gets the fruits/rental income? etc… etc… These may be answered by trusts
and other legal documents. But for now, let’s deal with straightforward donation.
What is Donor’s Tax?
Donor’s tax is imposed on tax on the transfer by any person, resident or non-
resident, of a property by gift. For an overview on donor’s tax, please check the BIR
website. The legal basis for donor’s tax may be found in Sec. 98 to Sec. 104 of the
National Internal Revenue Code (NIRC) (aka the Tax Code). Check also the Donor’s
and Estate Tax Regulations (BIR Revenue Regulations No. 2-2003) and Revenue
Memorandum Order (RMO) No. 1-98.
What is the tax base?

The donor’s tax base shall be the total value of the net gifts during the taxable year.
The value of the net gifts shall be based on the fair market value (FMV) of the gifts at
the time of donation. In case of real property, the tax base shall be the BIR Zonal
Value or FMV per Tax Declaration, whichever is higher. If there is no Zonal Value,
the tax base shall be the FMV based on the latest tax declaration. If there is an
improvement (like a house or a building), the FMV of the improvement shall be the
construction cost based on the building permit and/or occupancy permit plus 10%
per year after the year of construction, or the FMV based on the latest tax
declaration.
The term “net gift”, for purposes of donor’s tax, pertains to the net economic benefit
which the done gets from the transfer. Thus, if a property encumbered with a
mortgage is transferred as a gift, but the donee is required to pay the mortgage,
then the net gift is computed by deducting the amount of mortgage assumed by the
donee from the fair market value of the property given as a gift.
If you donate on different dates within a year, a donor’s tax return shall be filed for
each date of donation, and the donor’s tax base shall be based on the accumulated
donations for the current calendar year (January 1 to December 31). Thus, the more
gifts you make within a calendar year, the higher the probability that the donor’s tax
will fall on a higher tax bracket. Note though, that donor’s tax previously paid on
previous donations shall be deducted from the donor’s tax payable. The good news
here is that you will get a fresh start for each year, and effectively, you can donate
P100,000 in cash or in kind at zero donor’s tax.
You may even donate cash which the donee can use to purchase property, so the
property can be in the name of the donee. For example, a parent can donate cash
for installment payments of property so that the property may be declared in their
child’s name, since the child cannot purchase directly without a source of income.
Please note that in case of donation to relatives (not strangers), only one return shall
be filed for several gifts/donations by the donor (the one giving the donation) to the
different donees (those receiving the donation) on the same date. If the gift/donation
involves conjugal or community property, each spouse shall file a separate return for
their respective shares in the said property.
Deemed Gift
If you purchased a property below its fair market value (FMV), the difference
between the FMV and the selling price shall be deemed a gift of the seller, subject to
donor’s tax. This is also called a transfer for less than adequate consideration.
Exemptions from Donor’s Tax
1. Dowries or gifts made on account of marriage and before its celebration or within one
year thereafter by parents to each of their legitimate, recognized natural, or adopted
children to the extent of the first Ten thousand pesos (P10,000);
2. Gifts made to or for the use of the National Government or any entity created by any of
its agencies which is not conducted for profit, or to any political subdivision of the said
Government; and
3. Gifts in favor of an educational and/or charitable, religious, cultural or social welfare
corporation, institution, accredited non-government organization, trust or philanthropic
organization or research institution or organization, provided, however, That not more
than thirty percent (30%) of said gifts shall be used by such donee for administration
purposes.
Based on the BIR website, the following are likewise exempt from donor’s tax:
1. Encumbrances on the property donated if assumed by the donee in the deed of

donation
2. Donations made to the following entities as exempted under special laws:
 Aquaculture Department of the Southeast Asian Fisheries Development Center of the
Philippines
 Development Academy of the Philippines
 Integrated Bar of the Philippines
 International Rice Research Institute
 National Social Action Council
 Ramon Magsaysay Foundation
 Philippine Inventor’s Commission
 Philippine American Cultural Foundation
 Task Force on Human Settlement on the donation of equipment, materials and services
What are the Donor’s Tax rates?
The donor’s tax rate will be based on the law prevailing at the time of donation.
For donations made on January 1, 1998 up to the present, if the donee is a stranger,
the donor’s tax rate is thirty percent (30%).
A stranger is a person who is not a brother, sister (whether by whole or half-blood),
spouse, ancestor and lineal descendant, or a relative by consanguinity in the
collateral line within the fourth degree of relationship. This just means you are related
by blood, and you count the degree by going up first to the person who “connects”
you then go down.
ADVERTISEMENT
For example, your first cousin is within the fourth degree. You go “up” to your dad (1
degree), then “up” to your lolo (1 degree), then go “down” to your uncle who is your
dad’s brother (1 degree), then “down” to your first cousin (1 degree), so 4 degrees in
all.
Note that a child who is legally adopted is not considered a stranger. Donations
between corporations or from an individual to a corporation shall be considered as
donations to a stranger.
If the donee is not a stranger, the donor’s tax rate, based on the net gifts, are as
follows:
Over But not over The tax shall Plus Of the excess
be over
0 100,000 Exempt
100,000 200,000 0 2% 100,000
200,000 500,000 2,000 4% 200,000
500,000 1,000,000 14,000 6% 500,000
1,000,000 3,000,000 44,000 8% 1,000,000
3,000,000 5,000,000 204,000 10% 3,000,000
5,000,000 10,000,000 404,000 12% 5,000,000
10,000,000 1,004,000 15% 10,000,000

Who should pay
The donor or the transferor for less than adequate consideration
When to pay
Within thirty (30) days after the date the gift is made. If more than one gift or
donation is made within one year, a separate return should be filed for each
gift/donation within thirty (30) days after the date the gift is made.
BIR Form to be used

BIR Form No. 1800 (Donor’s Tax Return)
Where to file and pay/ Filing procedure

Prepare three copies of the donor’s tax return (two copies shall be for the BIR and
one copy shall be for the taxpayer) and file them with any Authorized Agent Bank
(AAB) of the Revenue District Office (RDO) having jurisdiction over the place of the
domicile of the donor (that is, where the donor lives) at the time of the transfer.
In places where there are no AAB, the return will be filed directly with the Revenue
Collection Officer or duly Authorized City or Municipal Treasurer where the donor
was domiciled at the time of the transfer. If the donor has no legal residence in the
Philippines, file the return with Revenue District No. 39 – South Quezon City (this is
along Quezon Avenue, with a DBP branch at the ground floor).
In the case of gifts made by a non-resident alien (that is, not a Filipino citizen), the
return may be filed with Revenue District No. 39 – South Quezon City, or with the
Philippine Embassy or Consulate in the country where donor is domiciled at the time
of the transfer.
Penalties for late payment

Same as other taxes, 25% surcharge plus 20% interest per year (under Secs. 248
and 249 of the Tax Code, respectively). If there is fraud, the surcharge shall be 50%.
You may also paycompromise penalties in lieu of imprisonment (click on the link for
the schedule of compromise penalties).
Documentary requirements
Based on the BIR website, the following requirements must be submitted before the
Tax Clearance Certificate/Certificate Authorizing Registration (that is, the document
required for the title to be transferred) can be released:
1. Deed of Donation
2. Sworn Statement of the relationship of the donor to the donee

3. Proof of tax credit, if applicable
4. Certified true copy(ies) of the Original/Transfer/Condominium Certificate of Title (front

and back ) of lot and/or improvement donated, if applicable
5. Certified true copy(ies) of the latest Tax Declaration (front and back pages) of lot and/or
improvement, if applicable
6. “Certificate of No Improvement” issued by the Assessor’s office where the properties

have no declared improvement, if applicable
7. Proof of valuation of shares of stocks at the time of donation, if applicable
• For listed stocks – newspaper clippings or certification issued by the Stock Exchange
as to the par value per share
• For unlisted stocks – latest audited Financial Statements of the issuing corporation with
computation of the book value per share
8. Proof of valuation of other types of personal properties, if applicable
9. Proof of claimed deductions, if applicable
10. Copy of Tax Debit Memo used as payment, if applicable
Additional requirements may be requested for presentation during audit of the tax
case depending upon existing audit procedures.
Sample Computation
Please read BIR Revenue Regulations No. 2-2003 for a sample computation.
Documentation of the donation

Consult a lawyer with regard to the format of the Deed of Donation, and make sure
that the donation is properly accepted and notarized during the lifetime of the donor.
~~~
At A Glance... [hide]
 1 In times of death, we still need to pay our taxes
 2 What is Estate Tax?
 3 What to do when someone has died
 4 Gross Estate
 5 Deductions from gross estate
 6 What are the Estate Tax rates?
 7 Sample computations
 8 When is an Estate Tax return required to be filed?
 9 When to file and pay
 10 Penalties for late payment
 11 BIR Form to be used
 12 Where to file
 13 How to Get A BIR Certificate Authorizing Registration (CAR)
 14 Further reading
What is Estate Tax?
Estate tax is imposed on the transfer of the net estate, which is the difference between
the gross estate (as defined under Section 85 of the Tax Code) and allowable
deductions (under Section 86) of the decedent. Estate tax rates are graduated and
depend on the net estate amount.
Net Estate = Gross Estate – Deductions
Real property may not be transferred from the decedent to his or her heirs without
the filing of the estate tax return and payment of the estate tax. Non-payment of
estate tax is common and this brings about many problems when the properties
need to be transferred to the names of buyers.
What to do when someone has died

Estate tax-wise, these are the things that need to be done:
1. File a Notice of Death with the Bureau of Internal Revenue within two months after the
date of death. This is applicable when the gross value of the estate exceeds
P20,000.00. This should be filed by the executor or administrator of the estate, or any
of the legal heirs. It shall be filed with the RDO where the decedent was domiciled at
the time of his death. There is no specific format.
2. Get a Tax Identification Number (TIN) for the Estate of the deceased person by
using BIR Form No. 1901. Use this TIN when filing the Estate Tax Return (BIR Form
No. 1801).
3. Prepare the list of assets and liabilities of the decedent. Get the fair market values of
the properties at the time of death.
4. Prepare the supporting documents for the assets and liabilities, as well as the
deductions you are going to take. You will need these for the estate tax computation
and as attachments to the Estate Tax Return.
1. Certified true copy of the Death Certificate
2. Notice of Death duly received by the BIR, if gross estate exceeds P20,000 for
deaths occurring on or after Jan. 1, 1998; or if the gross estate exceeds P3,000
for deaths occurring prior to January 1, 1998
3. Any of the following:
 Deed of Extra-Judicial Settlement of the Estate, if the estate is settled extra
judicially (sample forms may be found here and here).
 Court Orders/Decision, if the estate is settled judicially;
 Affidavit of Self-Adjudication (sample here) and Sworn Declaration of all
properties of the Estate
 A certified true copy of the schedule of partition of the estate and the order
of the court approving the same, if applicable.
4. Certified true copy(ies) of the Transfer/Original/Condominium Certificate of Title(s)
of real property(ies) (front and back pages), if applicable
5. Certified true copy of the latest Tax Declaration of real properties at the time of
death, if applicable
6. “Certificate of No Improvement” issued by the Assessor’s Office declared
properties have no declared improvement or Sworn Declaration/Affidavit of No
Improvement by at least one (1) of the transferees
7. Certificate of Deposit/Investment/Indebtedness owned by the decedent and the
surviving spouse, if applicable
8. Photocopy of Certificate of Registration of vehicles and other proofs showing the
correct value of the same, if applicable
9. Photo copy of certificate of stocks, if applicable
10. Proof of valuation of shares of stocks at the time of death, if applicable
 For listed stocks – newspaper clippings or certification from the Stock
Exchange
 For unlisted stocks – latest audited Financial Statement of issuing
corporation with computation of book value per share
11. Proof of valuation of other types of personal property, if applicable
12. Proof of claimed tax credit, if applicable
13. CPA Statement on the itemized assets of the decedent, itemized deductions from
gross estate and the amount due if the gross value of the estate exceeds two
million pesos, if applicable
14. Certification of Barangay Captain for claimed Family Home
15. Duly notarized Promissory Note for “Claims against the Estate” arising from
Contract of Loan
16. Accounting of the proceeds of loan contracted within three (3) years prior to death
of the decedent
17. Proof of the claimed “Property Previously Taxed”
18. Proof of claimed “Transfer for Public Use”
19. Copy of Tax Debit Memo used as payment, if applicable
5. Compute the net estate and estate tax.
6. File the Estate Tax Return and pay the estate taxes.
7. Follow the procedure for transferring real properties to the name of the heirs (this will
be discussed in a separate post).
8. Follow the procedure for cancellation of the TIN of the decedent as discussed in
Section 12 of Revenue Regulations No. 7-2012. Use BIR Form No. 1905 for the
cancellation of TIN.
Gross Estate
Gross estate is the value at the time of death of all property, real or personal,
tangible or intangible, wherever situated. In the case of a nonresident decedent who
at the time of his death was not a citizen of the Philippines, only that part of the entire
gross estate which is situated in the Philippines shall be included in his taxable
estate.
The value of the properties shall be based on their fair market value (FMV) as of the
time of death.
If the property is a real property, the FMV shall be the higher between the BIR zonal
valuation and FMV per tax declaration (I paraphrased this).
Please also note that also included in the computation of the gross estate are
interest or share in a property, transfers in contemplation of death, and revocable
transfers.
The proceeds of life insurance are included in the gross estate unless the beneficiary
is designated as irrevocable).
Deductions from gross estate
1. Expenses, Losses, Indebtedness, and Taxes (ELIT)

a. Funeral expenses – Lowest among:
 Actual funeral expenses;

 5% of the gross estate; and
 P200,000.00.
b. Judicial expenses of the testamentary and intestate proceedings
c. Claims against the estate

 At the time the indebtedness was incurred, the instrument was duly notarized; and
 If the loan was contracted within three (3) years before the death of the decedent, the
administrator or executor shall submit a statement showing the disposition of the
proceeds of the loan
d. Claims of the deceased against insolvent persons
e. Unpaid mortgages, etc.
2. Property Previously Taxed (Vanishing deduction)

3. Transfers for Public Use
 The amount of all bequests, legacies, devises or transfers to or for the use of the
Government of the Republic of the Philippines, or any political subdivision thereof, for
exclusively public purposes.
4. Family Home
 Fair Market Value of the Family Home or P1 million, whichever is lower.
 As a condition for the exemption or deduction, said family home must have been the
decedent’s family home as certified by the barangay captain of the locality.
5. Standard Deduction – P1 million (no substantiation needed)
6. Medical Expenses
 Medical expenses incurred by the decedent within one (1) year prior to his death which
shall be duly substantiated with receipts
 Maximum: P500,000.00
7. Amount received by heirs under RA 4917 (retirement benefits of employees of private
firms)
8. Share in the Conjugal Property
The net share of the surviving spouse in the conjugal partnership property as
diminished by the obligations properly chargeable to such property
What are the Estate Tax rates?

The estate tax rates depend on the date of death. For those who died on January 1,
1998 and onwards, the following are the estate tax rates based on the net estate:
Over But not over The tax shall be Plus Of the excess
over
0 200,000 Exempt
200,000 500,000 0 5% 200,000

500,000 2,000,000 15,000 8% 500,000
2,000,000 5,000,000 135,000 11% 2,000,000
5,000,000 10,000,000 465,000 15% 5,000,000
10,000,000 And Over 1,215,000 20% 10,000,000
ADVERTISEMENT
If the decedent died between July 28, 1992 to December 31, 1997, the following are
the applicable estate tax rates based on the net estate amount:
The Tax Of the Excess

Over But not Over Plus
Shall be Over
P 200,00.00 0%
P200,000.00 500,000.00 5% P 200,000.00
500,000.00 2,000,000.00 P 15,000.00 8% 500,000.00
2,000,000.00 5,000,000.00 135,000.00 12% 2,000,000.00
5,000,000.00 10,000,000.00 495,000.00 21% 5,000,000.00
10,000,000.00 1,545,000.00 35% 10,000,000.00
If the decedent died between January 1, 1973 and July 27, 1992, the following are
the applicable estate tax rates based on the net estate amount:
The Tax Of the Excess

Over But not Over Plus
Shall be Over
P 10,00.00 Exempt
P 10,000.00 50,000.00 3% P 10,000.00
50,000.00 75,000.00 P 1,200.00 4% 50,000.00
750,000.00 100,000.00 2,200.00 5% 75,000.00

100,000.00 150,000.00 3,450.00 10% 100,000.00
150,000.00 200,000.00 8,450.00 15% 150,000.00
200,000.00 300,000.00 15,950.00 20% 200,000.00
300,000.00 400,000.00 35,950.00 25% 300,000.00
400,000.00 500,000.00 60,950.00 30% 400,000.00
500,000.00 625,000.00 90,950.00 35% 500,000.00
625,000.00 750,000.00 134,700.00 40% 625,000.00
750,000.00 875,000.00 184,700.00 45% 750,000.00
875,000.00 1,000,000.00 240,950.00 50% 875,000.00
1,000,000.00 2,000,000.00 303,450.00 53% 1,000,000.00
2,000,000.00 3,000,000.00 833,450.00 56% 2,000,000.00
3,000,000.00 1,393,450.00 60% 3,000,000.00
If the decedent died between September 15, 1950 to December 31, 1972, the
following are the applicable estate tax rates based on the net estate amount:
From To ESTATE INHERITANCE
5,000.00 0 5,000.00 Exempt Exempt
7,000.00 5,000.00 12,000.00 1.0% 2&
18,000.00 12,000.00 30,000.00 2.0% 4%
20,000.00 30,000.00 50,000.00 2.5% 6%
30,000.00 50,000.00 70,000.00 3.0% 8%

Sample computations
Please refer to BIR Revenue Regulations No. 2-2003 for sample computations.
When is an Estate Tax return required to be filed?
 When the gross value of the estate exceeds P200,000 (though exempt from tax); or
 Regardless of the gross value of the estate, where the said estate consists of registered
or registrable property such as real property, motor vehicle, shares of stock, or other
similar property for which a clearance from the BIR is required as a condition precedent
for the transfer or ownership thereof in the name of the transferee
When to file and pay
 Within six (6) months from the decedent’s death;

 Unless an extension of time is requested in cases where the payment of the tax will
result in undue hardship on the heirs
 Not to exceed 5 years in case the estate is settled through the courts;
 Not to exceed 2 years in case the estate is settled extrajudicially.
Penalties for late payment
The penalties shall include 25% surcharge and 20% interest per year (Under Secs.
248 and 249, respectively). If fraud is involved, the surcharge shall be 50%. You may
also pay compromise penalties in lieu of imprisonment, which can be viewed at the
BIR’s website through the following link: Schedule of compromise penalties.
BIR Form to be used
 —BIR Form No. 1801 (Estate Tax Return)

Where to file
 The Authorized Agent Bank (AAB), Revenue District Officer (RDO) or duly authorized
Treasurer of the city or municipality where the decedent was domiciled at the time of his
death; or
 If there be no legal residence in the Philippines, with the Office of the Commissioner.
How to Get A BIR Certificate Authorizing Registration (CAR)
The Registry of Deeds will not allow you to transfer the title of real properties of a
deceased person if there is no BIR CAR. Please make sure that you have the
documents as enumerated in the Checklist of Documentary Requirements (CDR) for
Estate Tax, which can be found in Annex A-6 and A-6.1 of Revenue Memorandum
Order (RMO) No. 15-03 (see pages 7 to 9).
To help you determine the computation for the estate tax due, you may refer to
the ONETT (One-Time Transaction) Computation Sheet, in Annex B-3 (pages 16
and 17) also of RMO No. 15-03. Please also check the sample computations in BIR
RR No. 2-2003 and BIR Form No. 1801.
Further reading
For better understanding of estate taxes, I urge you to read the following:
1. Overview on Estate Tax

2. Sections 84 to 97 of the 1997 Philippine Tax Code
3. Revenue Regulations 2-03 (Estate Tax and Donor’s Tax Regulations)
4. Estate Tax Return (BIR Form No. 1801, front and back pages)
~~~
Thank you for reading and I hope this helps you. Should you have questions, please
read the estate tax-related documents I mentioned in my post, just follow the links
provided. Related post: Donor’s Tax as an estate planning tool
~~~
To our success and financial freedom!
Cherry Vi M. Saldua-Castillo
Real Estate Broker, Lawyer, and CPA

PRC Real Estate Broker License No. 3187
PRC CPA License No. 0102054
Roll of Attorneys No. 55239

What Is Capital Gains Tax On Real Estate

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What is Capital Gains Tax on Real

Capital Gains Tax vs. Income Tax

Capital assets vs. Ordinary assets

“Art. 415. The following are immovable property:

(3) Everything attached to an immovable in a fixed manner, in such a way that it

(5) Machinery, receptacles, instruments or implements intended by the owner of the

(6) Animal houses, pigeon-houses, beehives, fish ponds or breeding places of

(7) Fertilizer actually used on a piece of land;

Section 3 of RR No. 7-2003 provides the Guidelines in Determining Whether a

Tax Rate to be Used

2 ) Photocopy of the Transfer Certificate of Title; Original Certificate of Title; or

5 ) Copy of BIR Ruling for tax exemption confirmed by BIR, if applicable

6 ) Duly approved Tax Debit Memo, if applicable

7 ) “Sworn Declaration of Interest” as prescribed under Revenue Regulations 13-99,

8 ) Documents supporting the exemption

How to File the Capital Gains Tax Return

Sample CGT computation

FMV=Zonal Value x Floor Area

Now, let’s compute for the CGT to be shouldered by the buyer:

CGT for the buyer =6% x Excess

The CGT to be shouldered by the seller is as follows:

Capital Gains Tax Calculator

Gross Selling Price or Fair Market Value (whichever is higher) in PHP*

Capital Gains Tax due in PHP

In my next posts, I will be discussing Value-Added Tax (VAT), expanded withholding

Creditable Withholding Tax In Real

Background on the Withholding Tax System

“What is the rationale for this system?”, you may ask.

Creditable Withholding Taxes On Real Estate Transactions

a) gross selling price/total amount of consideration, or

Time and Place of Payment of Creditable Withholding Tax

Creditable withholding taxes deducted and withheld by the withholding agent/buyer

Taxes withheld in December shall be filed on or before January 15 of the following

Rules under Section 2.57.2 (J) of Revenue Regulations (RR) No.

B. Buyer is not engaged in trade or business

2. Cash Basis or Deferred Payment Sale Not on the Installment Plan

C. Buyer is engaged in trade or business

2. Cash Basis or Deferred Payment Sale Not on the Installment Plan

In any case, no Certificate Authorizing Registration (CAR)/Tax Clearance Certificate

It is to be clarified, however, that sale of interest in real property (real property

The subject of taxes is quite technical so I apologize if my explanation may seem

Why should we learn about taxes?

I also wrote about the Creditable Withholding Tax (CWT)

Tax base of output VAT

Time of payment of VAT

A. Deferred payment/Cash basis

BIR Form to use

Exemptions from VAT

To our success and financial freedom!

Full disclosure: Nothing to disclose.

[1] The BIR website has a summary on VAT

[3] You may download RR No. 7-2003

[5] RR No. 4-2007

[6] You may download RR 18-2011

[7] SEC. 4.105-2, Revenue Regulations (RR) No. 16-

[10] You may download a copy of RR No. 16-2011

[11] You may download a copy of RR No. 16-2011

[12] You may download a copy of RR No. 16-2011

More On Documentary Stamp Tax

DST on the sale of real property

DST on loan agreements

DST on lease agreements

Monthly rent P10,000.00