REA - Real Estate Concepts

Foreign Ownership of Land in the Philippines Real Estate Ownership in the Philippines General Rule: Phil Philip ippi pine ne rea reall esta estate te law law proh prohib ibit its s the the foreign ownership of ownership of land. (This prohibition is found in the Philippines Constitution.) forme formerr ilipi ilipinos nos and and Corpo Corporat ration ions s of Phil Philipp ippine ine nat nation ionali alit! t! ma! ma! own land" buildings" #ondominiums and townhouses $$$(% #orporation $$$(% #orporation is #onsidered to be of Philippine nationalit! if at least &' of the #orporation is owned b! ilipino #itiens.) foreig foreign n nation nationals als ma! ma! bu! bu! #ond #ondomi ominiu niums ms unit units s in Phil Philipp ippine ine #ondos (shares in #ondominium #orporations) as long as not more than *' of the units in a pro+e#t are a#,uired b! foreigners (Republi# ( Republi# %#t o. */& */&  - Condominium %#t) E0#eptions 1 *' oreign Ownership of Phil. Real Propert! 2 3and a#,uired before the 4567 #onstitution 2 %#,uisition through hereditar! su##ession su##ession if the foreigner is a legal or natural heir  2 oreigners who a#,uired Philippine propert! when the! used to be ilipino #itiens" will maintain ownership of those properties e8en after their #hange of #itienship. 2 ormer natural-born ilipino #itien sub+e#t to the limitations pres#ribed b! 3aw (9P ( 9P 47 and 47 and R.%. 45) 45 )  1 or residential purpose purpose 1 4"''' s,uare meters of urban land or 4 he#tare of rural land (9P 47) a 1 Cannot own both urban and rural land. Choose one t!pe onl!. b 1 Pre8ious ownership (when still a ilipino #itien) of residential urban or rural land will lower the 4"''' s, meter and 4 he#tare limits abo8e. c 1 Can own a ma0imum of two (/) lots onl!. d 1 Those lots must be in different #ities or muni#ipalities in the Philippines. e 1 % transferee of residential land a#,uired under 9P 47 ma! still a8ail of the pri8ileges granted under R.%. under  R.%. '*/ as '*/ as amended b! R.%. 45.  1 or business or other #ommer#ial #ommer#ial purpose 1 7"''' s, ms of urban land or 6 has of rural land. $$$ (;e#tion 7 of Rule the land should be primaril!" dire#tl! and a#tuall! used in the performan#e or #ondu#t of the owner?s business or #ommer#ial a#ti8ities in the broad areas of agri#ulture" industr! and ser8i#es in#luding the lease of land but e0#luding the bu!ing or selling thereof.@) a- Ownership (when still a ilipino #itien) of urban or rural land used for business purposes will lower the 7"''' s,uare meter and 6 he#tare limits. b- Ownership of onl! one t!pe of land is allowed either urban or  rural not both. c- Ownership is restri#ted to / lots. Ea#h lot must be in a different muni#ipalit!. muni#ipalit!. Ownership of Aouses or 9uildings b! oreigners in the Phil. oreig oreigner ners s m! own own buildi buildings ngs or or houses houses in in the Phil Philipp ippine ines s legall! legall!BB as long as the! do not own the land on whi#h it is built. oreig oreign n indi8id indi8idual uals" s" #orpo #orporat ration ions s or asso#i asso#iati ations ons ma! ma! lease lease land land for a period of /7 !ears renewable for another /7 !ears. (P. . o *4" i0ing a Da0imum a Da0imum Period for the uration of 3eases or Pri8ate 3ands to %liens) %liens ) Compan Companies ies or or indi8i indi8idua duals ls in8es in8estin ting g in the the Philip Philippin pines es ma! ma! re#ei8 re#ei8e e go8ernment permission to lease land for up to 7' !ears renewable for another /7 !ears. ( Republi# %#t o. &7/" otherwise now as the =n8estors? 3ease %#t) %#t)

Value Added Tax (VAT) (VAT)

Why should we learn about taxes? Why is it important to know whether the sale of a certain property is subject to VAT and Creditable Withholding Tax (CWT! or o r Capital Capita l "ains Tax (C"T? To put it simply! if you pay the wrong tax! for example! C"T instead of VAT and CWT! you may be liable for de#ciency VAT and CWT plus penalties! and you would ha$e to undergo a long and di%cult process to get a refund Aside from the $ery painful payment of a lot of taxes! there may be a delay in the release of the Certi#cate Authori&ing 'egistration (CA' which you need in order for the title to the property to be transferred transferred to the name of the buyer )n addition to the abo$e! VAT should be considered in the pricing of real estate sold *ote that compared compared to a capital asset subject to +, C"T! C"T! an ordinary asset will be subject to CWT of as high as +, plus -., VAT Thus! VAT may make or break a transaction! or lower the pro#t of the seller When is a sale of real property subject to VAT? / )f 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 and0or receipts exceed 1-!2-2!34444 in a year )f he is not originally registered as a VAT entity but he exceeded the threshold! he should submit 5)' 6orm *o -243 (Taxpayer 'egistration 7pdate to change to VAT When is an asset considered as ordinary? 8rdinary assets are those which are9 / :tock in trade of a taxpayer or other real property of a kind which would properly be included in the in$entory of the taxpayer if on hand at the close of the taxable year; or / 'eal property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or / 'eal property used in trade or business (ie! buildings and0or impro$ements of a character which is subject to the allowance for depreciation pro$ided for under :ec 7'5 or >7@CC as a real estate dealer or de$eloper shall be su%cient for a taxpayer to be considered as habitually engaged in the sale of real estate )f the taxpayer is not registered with the >7'5 or >7@CC as a real estate dealer or de$eloper! he0it may ne$ertheless be deemed to be engaged in the real estate business through the establishment of substantial rele$ant e$idence (such as consummation during the preceding year of at least six (+ taxable real estate sale transactions! regardless of amount; registration as habitually engaged in real estate business with the ocal "o$ernment 7nit or the 5ureau of )nternal 'e$enue (5)'! etc A person who is not engaged in the real estate business but who is selling real property which is classi#ed as its ordinary asset is also subject to VAT  This is pursuant to '' *o =/4 which pro$ides9 B>owe$er! e$en if the real property is not primarily held for :ale to customers or held for lease in the ordinary course of trade or business but the same is used in the trade or business of the seller! the sale thereof shall be subject to VAT being a transaction incidental to the taxpayers main businessD  Thus! if a taxpayer is engaged in the restaurant business and sells his restaurant building which he used in his restaurant business! the said sale shall be subject to VAT! notwithstanding that the taxpayer is not engaged in the real estate business 5anks are not considered as VAT taxpayers Thus! their sale of foreclosed properties are not subject to VAT  They are subject instead to Creditable Withholding tax (CWT Their foreclosed assets! when sold! are considered as ordinary assets but banks are not considered as engaged in the real estate business VAT rate  The sale of properties which may be considered as ordinary assets would be subject to the -.,E VAT eFecti$e 6ebruary -! .44+  Tax base of output VAT

 The tax base of the -., output VAT is the selling price (:1 or the fair market $alue (6GV of the property whiche$er is higher )f VAT is not billed separately in the document of sale! the selling price stated in the deed is deemed inclusi$e of VAT Thus! to get the selling price without VAT! di$ide the selling price in the deed by --. To get the VAT! multiply the selling price without VAT by -. What if the gross selling price in the document of sale is eHual to the &onal $alue or market $alue of the property? Will the selling price without VAT be eFecti$ely lower than the &onal or market $alue of the property? *o! the &onal0market $alue shall be considered as net of the output VAT IIIthe VAT should be separately indicated in the document of sale and o%cial receipt as there are penalties for non/compliance

VAT payable  The amount of  VAT payable is the diFerence between the output VAT and input VAT Jeep the VAT/registered o%cial receipts (for ser$ices purchased and in$oices (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 )nstallment :ale or a @eferred 1ayment :ale A sale is on installment if the initial payments in the year of sale do not exceed.3, of the gross selling price A sale is considered as cash or deferred payment if the initial payments in the year of sale exceed .3, of the gross selling price )nitial payments means payment or payments which the seller recei$es before or upon execution of the instrument of sale and payments which he expects or is scheduled to recei$e in cash or property (other than e$idence of indebtedness of the purchaser during the taxable year when the sale or disposition of the real property was made )t co$ers any downpayment made and includes all payments actually or constructi$ely recei$ed during the calendar year of sale! the aggregate of which determines the limit set by the law )n other words! add the downpayment plus all amorti&ation payments (principal portion only during the year and compute if the total exceeds .3, of the gross selling price A @eferred payment0Cash basis  The transaction shall be treated as a cash sale which makes the entire selling price subject to VAT in the month of sale 5 )nstallment basis

Kach installment payment actually and0or constructi$ely recei$ed by the seller is subject to VAT

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 The monthly VAT return should be #led on or before the .4th day of the month following the close of the -st two months of the Huarter (6ebruary .4! Garch .4! Gay .4! Lune .4! August .4! :eptember .4! *o$ember .4! @ecember .4 while the Huarterly VAT return should be #led on or before the .3th day of the month following the last month of the Huarter (April .3! Luly .3! 8ctober .3! Lanuary .3 1lace of payment  The VAT should be paid at the Authori&ed Agent 5ank (AA5 of the 'e$enue @istrict 8%ce ('@8 where the real property is located )n places where there are no AA5! the return shall be #led directly with the 'e$enue Collection 8%cer or Authori&ed City or Gunicipal  Treasurer Kxemptions from VAT  The following are exempt from VAT9 :ale of residential lot not exceeding 1-!2-2!34444 (eFecti$e Lanuary -! .4-.! as per '' *o -+/.4-- )f two or more adjacent lots are sold or disposed in fa$or of one buyer! for the purpose of utili&ing the lots as one residential lot! the sale shall be exempt from VAT only if  the aggregate $alue of the lots does not exceed 1-!2-2!34444 (eFecti$e Lanuary -! .4-.! as per '' *o -+/.4-- )n practice! ) ha$e heard of cases where adjacent condominium units are bought but the selling prices are not aggregated for purposes of computing whether the sale exceeds the threshold ) belie$e 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 aggressi$e position :ale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business (in other words! a capital asset; :ale of real property utili&ed for low/cost ( ie 134!44444 and sociali&ed housing ( ie 1=44!444 as de#ned by 'epublic Act *o .2 or the 7rban @e$elopment and >ousing Act of -22.; :ale of residential house and lot not exceeding 1#apital assets@ is defined negati8el! in ;e#tion 65(%)(4) of the Ta0 Code as follows: >Capital %ssets. 1 the term I#apital assets? means propert! held b! the ta0pa!er (whether or not #onne#ted with his trade or business)" but does not in#lude 2 sto# in trade of the ta0pa!er or other propert! of a ind whi#h would properl! be in#luded in the in8entor! of the ta0pa!er if on hand at the #lose of the ta0able !ear" or  2 propert! held b! the ta0pa!er primaril! for sale to #ustomers in the ordinar! #ourse of his trade or business" or  2 propert! used in the trade or business" of a #hara#ter whi#h is sub+e#t to the allowan#e for depre#iation pro8ided in ;ubse#tion () of ;e#tion 6*B 2 or real propert! used in trade or business of the ta0pa!er.@ >#apital assets@ and >ordinar! assets@ as applied to the real estate industr! - ;e#tion /(#) of Re8enue Regulations (RR) o. -/''6 dated e#ember /" /''/. - =t?s essentiall! the same as the abo8e definition. - =t has an additional pro8ision on real properties a#,uired b! bans through fore#losure sales  1 the same are #onsidered as their ordinar! assets but bans shall not be #onsidered as habituall! engaged in the real estate business for purposes of determining the appli#able rate of e0panded withholding ta0. ;in#e we are taling about the sale of real propert! here" we need to now the definition of >real propert!@. ;e#tion /(#) of RR o. -/''6 o  >Real propert! shall ha8e the same meaning attributed to that term under %rti#le *47 of Republi# %#t o. 6&" otherwise nown as the >Ci8il Code of the Philippines.@ %rti#le *47 of the Ci8il Code pro8ides: o >%rt. *47. The following are immo8able propert!: (4) 3and" buildings" roads and #onstru#tions of all inds adhered to the soilB (/) Trees" plants" and growing fruits" while the! are atta#hed to the land or form an integral part of an immo8ableB (6) E8er!thing atta#hed to an immo8able in a fi0ed manner" in su#h a wa! that it #annot be separated therefrom without breaing the material or deterioration of the ob+e#tB (*) ;tatues" reliefs" paintings or other ob+e#ts for use or ornamentation" pla#ed in buildings or on lands b! the owner of the immo8able in su#h a manner that it re8eals the intention to atta#h them permanentl! to the tenementsB (7) Da#hiner!" re#epta#les" instruments or implements intended b! the owner of the tenement for an industr! or wors whi#h ma! be #arried on in a building or on a pie#e of  land" and whi#h tend dire#tl! to meet the needs of the said industr! or worsB (&) %nimal houses" pigeon-houses" beehi8es" fish ponds or breeding pla#es of similar nature" in #ase their owner has pla#ed them or preser8es them with the intention to ha8e them permanentl! atta#hed to the land" and forming a permanent part of itB the animals in these pla#es are in#ludedB () ertilier a#tuall! used on a pie#e of landB () Dines" ,uarries" and slag dumps" while the matter thereof forms part of the bed" and waters either running or stagnantB

(5) o#s and stru#tures whi#h" though floating" are intended b! their nature and ob+e#t to remain at a fi0ed pla#e on a ri8er" lae" or #oastB (4') Contra#ts for publi# wors" and ser8itudes and other real rights o8er immo8able propert!.@ $$$Thus" it appears that it is not onl! the sale of land and buildings or houses whi#h we should be fo#using on" but also the sale of the abo8e. $$$RR o. -/''6 - ;e#tion 6 of RR o. -/''6 pro8ides the Guidelines in etermining Fhether a Parti#ular Real Propert! is a Capital %sset or Ordinar! %sset - if the propert! is not ordinaril! held for sale (as in8entor!) or used in business and sub+e#t to depre#iation" then the propert! is a #apital asset. - if a seller is engaged in the real estate business" and the propert! is one he holds out for sale to the publi#" then the propert! ma! be #onsidered as an ordinar! asset ote that there ma! be instan#es when a seller is engaged in the real estate business but the propert! is not held for sale or used in business or was idle for a long time 1 this is one of the instan#es when the propert! ma! be #onsidered a #apital asset.H - if a seller is not engaged in the real estate business" and the propert! is not used in business and sub+e#t to depre#iation" the propert! ma! be #onsidered as a #apital asset" the sale of whi#h is sub+e#t to CGT Ta0 Rate to be Jsed Fhen the real propert! whi#h is a #apital asset to the seller is sold" the gross selling pri#e or fair maret 8alue (DK) onal 8alueH" whi#he8er is higher" will be sub+e#t to ! CGT Te#hni#all!" it?s not reall! onl! the gain (selling pri#e less #ost) whi#h is ta0ed" be#ause e8en if the seller suffered a loss (that is" the selling pri#e is lower than the original a#,uisition #ost of the propert!)" there will still be CGT" be#ause a gain is al wa!s presumed On the other hand" if the seller is engaged in the real estate business" and the real propert! sold is an ordinar! asset" the sale will be sub+e#t to RC=T or minimum #orporate in#ome ta0 (DC=T)" when appli#ableH if the ta0pa!er is a #orporation and in#ome ta0 if  the seller is an indi8idual. The pro#eeds from the sale of the real propert! will be in#luded in the seller?s global in#ome (meaning in#ome from all sour#es 1 note that domesti# #orporations and resident #itiens are ta0ed on all sour#es of in#ome" whether from within or outside the #ountr!) and onl! the net in#ome" after allowable dedu#tions su#h as depre#iation" losses" et#. will be sub+e#ted to RC=T" DC=T" or regular in#ome ta0" whi#he8er is appli#able.

7nder 'epublic Act *o 2