TAXATION ON SALE OF REAL PROPERTIES

A. TAXATION - Definition

Taxation is the inherent power of the sovereign State to raise money or revenue
necessary to finance the functions and operations of the Government.

LAWS GOVERNING REAL PROPERTY TAXATION

NATIONAL TAXATION LOCAL TAXATION

(RA 10963) (Local Government Code of 1991)

B. THE LAW GOVERNING THE IMPOSTION OF TAX BY BIR

RA 10963 – Tax Reform for Acceleration and Inclusion (“TRAIN”)

Effectivity : January 1, 2018

C. CAPITAL ASSET vs. ORDINARY ASSET

Before determining the applicable tax rate for any real estate transaction, the
classification of the real property must be determined as to whether it is a capital asset
or an ordinary asset.

1.DEFINITION

CAPITAL ASSET, as defined, is the property held by the taxpayer, whether or not
connected with his trade or business, but does not include :

1. Stock in trade of the taxpayer

2. 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
3. Property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business
4. Property used in trade or business, of a character which is subject to the
allowance for depreciation provided under the Tax Code
5. Real property used in trade or business of the taxpayer

Taxation on Sale of Real Properties – RLD 1

In short, ORDINARY ASSETS are those included in items No. 1 to 5

• Real Properties acquired by banks through foreclosure sales are considered as

their ordinary assets. However, banks shall not be considered as habitually
engaged in the real estate business for purposes of determining the applicable
rate of withholding tax imposed under Sec. 2.57.2 (J) of revenue Regulation No.
2-98 as amended. (Sec. 2 (b) RR No. 7-2003).

D. CAPITAL GAINS TAX ON SALE OF REAL PROPERTY

(ON CAPITAL ASSETS)

Capital Gains Tax

- SIX PERCENT (6%) based on the gross selling price or current fair market value as
determined in accordance with Sec. 6(E) of the Tax Code, whichever is higher, and is
imposed upon capital gains presumed to have been realized from the sale, exchange,
or other disposition of real property located in the Philippines, classified as capital
assets, including pacto de retro sales and other forms of conditional sales, by
individuals, including estates and trusts.

NOTE that the basis of the capital gains tax is the value which is HIGHER :

E. WHERE AND WHEN TO PAY CAPITAL GAINS TAX

1. GENERAL RULE

WHERE TO PAY- In the BIR Revenue District Office (through the authorized agent bank
(AAB)) WHERE THE PROPERTY IS LOCATED

WHEN TO PAY - Within thirty (30) days from date of notarization of the deed of sale

Revenue Regulation No. 6-2014 as amended by Revenue Regulation No. 5-2015 provides
for the mandatory use of Electronic Bureau of Internal Revenue Forms (eBIRForms) for
One Time Transaction (ONETT) taxpayers.

F. BASIC PENALTY FOR LATE FILING AND PAYMENT OF TAXES

PENALTY - 25% Surcharge on basic tax due

- 50% Surcharge in case of fraud or intent to evade tax

INTEREST - General interest on unpaid amount of tax is changed to 12% (at double
the rate of legal interest rate for loans or forbearance of any money in the absence of an
express stipulation as set by the BSP; prevailing BSP-set legal interest is 6%)

Taxation on Sale of Real Properties – RLD 2

Additional proviso:

Deficiency and delinquency interest shall in no case be imposed simultaneously.

COMPROMISE PENALTY - Subject to type and amount of tax due

G. SALE BY CORPORATIONS OF CAPITAL ASSETS

For corporations, the sale, exchange or other disposition of real property, considered as
capital asset, is subject to the final capital gains tax of

SIX percent (6%) based on the gross selling price or fair market value as determined in
accordance with Sec. 6(E) of the Tax Code, whichever is higher.

H. DOCUMENTARY STAMP TAX

1. Documentary Stamp Tax must also be paid on the sale, exchange or other disposition
of the real property,based on the gross selling price or the fair market value, as
determined under Sec. 6(E) of the Tax Code, whichever is higher, as follows :

ON DEEDS OF SALE AND

CONVEYANCES OF REAL PROPERTY

IFOF REAL PROPERTY

CONSIDERATION OR VALUE RECEIVED IS

➢ P 1,000.00 OR LESS - P15.00

➢ FOR EACH ADDITIONALOne Thousand Pesos (P1,000.00) - P15.00
or fraction thereof

Or, ONE AND A HALF PERCENT (1.5%)

ON MORTGAGES, PLEDGES AND

DEEDS OF TRUST

WHEN AMOUNT SECURED is

➢ P 5,000.00 OR LESS - P 40.00

➢ FOR EACH ADDITIONAL
Five Thousand Pesos (P5,000.00) - P 20.00
or fraction thereof

Taxation on Sale of Real Properties – RLD 3

 ON LEASE AGREEMENTS

➢ First P 2,000.00 - P 6.00

➢ FOR EACH ADDITIONAL
One Thousand Pesos (P1,000.00) - P 2.00
or fraction thereof

2. FILING AND PAYMENT OF DOCUMENTARY STAMP TAX

Time for Filing of Documentary Stamp Tax Returns and the Payment of Taxes Due
Thereon.

The documentary stamp tax return shall be filed within

FIVE (5) days after the close of the month when the taxable document was made,
signed, accepted, or transferred, and the tax thereon shall be paid at the same time
the aforesaid return is filed.”

I. TOTAL TAXES ON SALE, EXCHANGE OR OTHER DISPOSITION

OF REAL PROPERTY CONSIDERED AS CAPITAL ASSET

CAPITAL GAINS TAX - 6.0%

DOC. STAMP TAX - 1.5%

TOTAL TAXES - 7.5%

J. DOCUMENTS TO BE SUBMITTED TO THE BIR

(Sale, Exchange or Other Disposition subject to Capital Gains Tax)

1. BIR Capital Gains Tax Form (BIR Form 1706)

2. BIR Documentary Stamps Tax Form
3. Original and photocopy of notarized deed of sale or exchange
4. Transfer Certificate of Title (or Condominium Certificate of Title, for condominiums)
5. Latest Tax Declaration
6. Sworn Declaration of No Improvement/ Certification of No Improvement issued by
Assessor's Office, if what is sold is land only without improvements
7. Copy of BIR Ruling for tax exemption, if applicable
8. Duly approved tax debit memo, if applicable
9. Sworn declaration of interest (if applying for exemption on capital gains tax on sale
of residence)
10. Escrow Agreement (if applying for exemption on capital gains tax on sale of
residence)
11. Other documents that the BIR may require

Taxation on Sale of Real Properties – RLD 4

K. EXTRAJUDICIAL FORECLOSURE OF CAPITAL ASSETS INITIATED BY BANKS,
FINANCE AND INSURANCE COMPANIES

1. PAYMENT OF CAPITAL GAINS TAX

a. In case the mortgagor exercises his right of redemption within one (1) year from the
issuance of the certificate of sale, NO CAPITAL GAINS TAX shall be imposed because no
capital gains has been derived by the mortgagor and no sale or transfer of real property
was realized.

b. In case on NON-REDEMPTION, the capital gains tax on the foreclosure sale based on
the bid price of the highest bidder but only upon expiration of the one-year period of
redemption and shall be paid within thirty (30) days from the expiration of the said one
(1) year redemption period.

2. PAYMENT OF DOCUMENTARY STAMP TAX

a. In case the mortgagor EXERCISES HIS RIGHT OF REDEMPTION, the transaction

shall only be subject to the documentary stamp tax

b. In case on NON-REDEMPTION, the documentary stamp tax shall be paid as

prescribed by the Tax Code within five (5) days after the close of the month following the
lapse of the one (1) year redemption period and based on the bid price.

L. CREDITABLE WITHHOLDING TAX ON SALE OF ORDINARY ASSETS (Or other

than capital assets)

In case of real property sold, other than capital assets, it will be subject to the following
taxes:

1. CREDITABLE WITHHOLDING TAX (CWT)

(Under RR No. 11-2018)

Section (F) of RR 11-2018: Gross selling price or total amount of consideration

or its equivalent paid to the seller/owner for the sale, exchange or transfer of
real property classified as ordinary asset – A creditable withholding tax based on
the gross selling price/total amount of consideration or the fair market value determined
in accordance with Section 6(E) of the Code, whichever is higher, paid to the seller/owner
for the sale, transfer or exchange of real property, other than capital asset, shall be
imposed upon the withholding agent,/buyer, in accordance with the following schedule:

A. Where seller/transferor is exempt from creditable

withholding tax in accordance with Sec 2.57.5 of
these regulations Exempt

Taxation on Sale of Real Properties – RLD 5

B. Upon the following values of real property, where
the seller/transferor is habitually engaged in the
real estate business:

With a selling price of Five Hundred Thousand

Pesos (P500,000.00) or less 1.5%

With a selling price of more than Five Hundred

Thousand Pesos (P500,000.00) but not more
than Two Million Pesos (P2,000,000.00) 3.0%

With a selling price of more than Two Million Pesos

(P2,000,000.00) 5.0%

C. Where the seller/transferor is not habitually 6.0%

engaged in the real estate business

Registration with the HLURB or HUDCC (Now Department of Human Settlement

and Urban Development or DHSUD) shall be sufficient for a seller/transferor to be
considered as habitually engaged in the real estate business. If the seller/transferor is
not registered with HULRB or HUDCC (now DHSUD), he/it may prove that he/it is
engaged in the real estate business by offering other satisfactory evidence (for
example, he/it consummated during the preceding year at least six taxable real estate
transactions, regardless of amount). Notwithstanding the foregoing, for purposes of
these Regulations, banks shall not be considered as habitually engaged in the real estate
business.

Gross selling price shall mean the consideration stated in the sales document or the fair
market value determined in accordance with Section 6 (E) of the Code, whichever is higher.
In an exchange, the fair market value of the property received in exchange shall be
considered as the consideration.

2. CREDITABLE WITHHOLDING TAX - INSTALLMENT SALES

Gross selling price or total amount of consideration or its equivalent paid to the
seller/owner for the sale, exchange, or transfer of real property classified as
ordinary asset.-
xxx xxx xxx
If the buyer is an individual not engaged in trade or business, the following rules shall
apply:

(i) 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

Taxation on Sale of Real Properties – RLD 6

required to be made on the periodic installment payments. In such 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.
(ii) xxx xxx xxx

However, if the buyer is engaged in trade or business, whether a corporation or

otherwise, these rules shall apply:

(i) 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.

The term “consideration” refers to the selling price exclusive of interest. Interest earned
as an incident of installment payment, if any, shall be subject to the ordinary income
tax rate.

(ii) xxx xxx xxx

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 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 payment of all applicable taxes before the issuance of
CAR/TCL.

It is to be noted, that in case of sale of real property paid under installment payment or
deferred payment basis, the payment of the documentary stamp tax (DST) shall accrue
upon the execution of the Deed of Absolute Sale but the basis for the imposition thereof
shall be the gross selling price or fair market value of the property, whichever is higher,
at the time of the execution of the Contract to Sell.

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

Taxation on Sale of Real Properties – RLD 7

be considered a separate sale or 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 using
the same basis.

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

purchased on instalment 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.

xxx xxx xxx

3. Manner, Venue and Time of Filing of Withholding Tax Returns and Payment of
Taxes Withheld at Source

Taxpayers mandated to electronically file and pay shall use the BIR’s electronic system,
while those not mandated has the option to either use the said electronic system, or file
with the Authorized Agent Banks (AABs) under the jurisdiction of the Revenue District
Office where they are registered.

In the case of sale of real property considered as capital asset, the filing and payment of
the tax due thereon shall be made within thirty (30) days after the sale or disposition
using BIR Form No. 1706,

For sale of real property considered as ordinary asset, the remittance of tax withheld
shall be made on or before the tenth (10th) day following the month of transaction using
BIR Form No. 1606.

M. WITHHOLDING TAX ON OTHER TRANSACTIONS

1. On Lease or Rentals of Real Properties

- On gross rental for the continued use or possession of real property used in business
which the payor or obligor has not taken or is not taking title, or in which he has no
equity – Five percent (5%)

Taxation on Sale of Real Properties – RLD 8

2. On Professional Fees of Real Estate Practitioners

Individual payee:

If gross income for the current year did not exceed ₱3M - Five percent (5%);
If gross income is more than ₱3M or VAT registered
Regardless of the amount - Ten percent (10%)

Non-individual payee:

If gross income for the current year did not exceed ₱720,000 -Ten percent (10%);
If gross income exceeds ₱720,000 - Fifteen percent (15%)

N. WHEN TO PAY WITHHOLDING TAX - Within the TEN (10) DAYS after the
end of each month

O. UPDATES

• Revenue Regulations 8-2021

- Beginning January 1, 2021, the VAT exemption shall only apply to

sale of real properties NOT primarily held for sale to customers or
held for lease in the ordinary course of trade or business: The sale
of HOUSE AND LOT and OTHER RESIDENTIAL DWELLINGS with
a selling price of not more than Php3,199,200.00 as adjusted in
2011 using the 2010 Consumer Price Index
-
• CREATE LAW

- For the period from July 1, 2020 to June 30, 2023, the rate of
percentage tax shall be 1%.

- Percentage taxpayers who have overpaid taxes as a result of the

decrease of tax rate from 3% to 1% starting July 1, 2020 are allowed
for a tax refund in the event that: 1. The taxpayer shifted from
non VAT to VAT-registered status: or 2. The taxpayer has opted to
avail the eight percent (8%) income tax rate at the beginning of TY
2021

Taxation on Sale of Real Properties – RLD 9