Philippine Tax on Property Sale: Which Comes First—ONETT or Capital Gains Tax?

Introduction

In the Philippines, the sale of real property triggers several tax obligations under the National Internal Revenue Code (NIRC) of 1997, as amended by subsequent laws such as Republic Act No. 10963 (TRAIN Law) and Republic Act No. 11534 (CREATE Law). These taxes ensure that the government captures revenue from capital appreciation and transactional activities. Key among them are the Capital Gains Tax (CGT) and the Documentary Stamp Tax (DST), which are often processed through the Bureau of Internal Revenue's (BIR) One-Time Transaction (ONETT) system. A common point of confusion for taxpayers is the relationship between ONETT and CGT—specifically, which "comes first" in the compliance process. This article provides a comprehensive examination of the taxes involved in property sales, the legal framework, procedural steps, exemptions, penalties, and clarifications on the ONETT-CGT interplay, all within the Philippine context.

Classification of Real Property: Capital Asset vs. Ordinary Asset

The taxation of a property sale begins with determining whether the real property is a capital asset or an ordinary asset, as this dictates the applicable taxes.

• Capital Asset: Real property not used in trade or business, such as residential lots or vacation homes held for investment. Sales of capital assets are subject to CGT at a flat rate of 6% based on the gross selling price, zonal value, or fair market value (whichever is highest). This is final and not creditable against income tax.

• Ordinary Asset: Real property used in trade or business, such as inventory lots for real estate dealers or properties held by developers. Sales of ordinary assets are subject to:

  • Creditable Withholding Tax (CWT) ranging from 1.5% to 6%, depending on the seller's status and property value.
  • Value-Added Tax (VAT) at 12% if the seller is VAT-registered and the sale exceeds certain thresholds (e.g., PHP 3.199 million for residential lots as of 2023 adjustments).
  • Income tax on any net gain, treated as ordinary income.

The distinction is crucial, as misclassification can lead to underpayment or overpayment. For instance, if a property is habitually bought and sold, it may be reclassified as an ordinary asset by the BIR under Section 39 of the NIRC.

Key Taxes on Property Sales

Beyond classification, several taxes apply universally or conditionally:

1. Capital Gains Tax (CGT):

   • Imposed under Section 24(D) of the NIRC.
   • Rate: 6% on the higher of the selling price, BIR zonal value, or provincial assessor's fair market value.
   • Applicable to capital assets only; not deductible as a loss if the sale results in a loss.
   • Filing: BIR Form No. 1706, due within 30 days from the date of sale (notarization date of the Deed of Sale).

2. Documentary Stamp Tax (DST):

   • Under Section 196 of the NIRC.
   • Rate: 1.5% (PHP 15 per PHP 1,000) on the higher of the selling price or fair market value.
   • Applies to all conveyances, deeds, or instruments transferring real property rights.
   • Filing: BIR Form No. 2000-OT for one-time transactions.

3. Creditable Withholding Tax (CWT):

   • For ordinary assets, under Revenue Regulations (RR) No. 2-98, as amended.
   • Rates: 1.5% for non-resident sellers, up to 6% for resident individuals or corporations.
   • Buyer withholds and remits via BIR Form No. 2307.

4. Value-Added Tax (VAT):

   • Section 109 of the NIRC exempts certain sales (e.g., socialized housing), but generally 12% on gross selling price for VAT-liable sales.

5. Local Transfer Tax:

   • Imposed by local government units (LGUs) under Section 135 of the Local Government Code (LGC).
   • Rate: Up to 0.75% in provinces (0.5% in cities/municipalities within Metro Manila) on the higher of selling price or assessed value.
   • Paid to the provincial/city treasurer.

6. Registration Fees:

   • Payable to the Registry of Deeds (RD) under the Property Registration Decree (PD 1529).
   • Typically 0.25% to 1% of the property value, plus miscellaneous fees.

What is ONETT?

ONETT, or One-Time Transaction, refers to the BIR's administrative framework for handling non-recurring tax events that do not require regular taxpayer registration. Introduced under Revenue Memorandum Order (RMO) No. 9-2000 and enhanced by subsequent issuances like RMO No. 27-2015, ONETT encompasses transactions such as:

• Sales of real property classified as capital assets (subject to CGT).
• Donations (Donor's Tax).
• Estate settlements (Estate Tax).
• Other isolated sales not in the ordinary course of business.

ONETT is not a separate tax but a procedural category and system for filing and processing these taxes. The BIR's eONETT system allows online filing for efficiency. For property sales, ONETT groups the computation and payment of CGT and DST, ensuring they are handled as a single compliance event. Taxpayers dealing with ONETT transactions are often "one-time taxpayers" who do not need a full Taxpayer Identification Number (TIN) unless they have other obligations.

Which Comes First: ONETT or Capital Gains Tax?

The query "which comes first—ONETT or Capital Gains Tax?" arises from a misunderstanding of their relationship. ONETT is the overarching process, while CGT is the specific tax applied within it for capital asset sales. In essence, they are not sequential but integrated:

• ONETT as the Starting Point: The process begins with identifying the transaction as an ONETT event. The taxpayer files under the ONETT system using relevant forms (e.g., BIR Form 1706 for CGT and 2000-OT for DST). This filing triggers the computation of CGT.

• CGT Payment Within ONETT: CGT is calculated and paid as part of the ONETT processing. There is no "CGT before ONETT" or vice versa; CGT is embedded in the ONETT workflow. For example, upon filing BIR Form 1706, the BIR computes the CGT due, and payment is made at an Authorized Agent Bank (AAB) or Revenue Collection Officer (RCO).

• Practical Sequence: In practice, the ONETT application (filing) precedes the actual payment of CGT. However, they occur in tandem during the 30-day filing period. Delaying either can halt the issuance of the Electronic Certificate Authorizing Registration (eCAR), which is required for title transfer.

If the property is an ordinary asset, ONETT does not apply, and taxes like CWT and VAT are handled through regular withholding and quarterly filings instead.

Step-by-Step Compliance Process for Property Sales

To ensure smooth title transfer, follow this sequence:

1. Execute the Deed of Sale: Notarize the document; this starts the 30-day clock for BIR filings.

2. Secure Required Documents:

   • Tax Declaration from the Assessor's Office.
   • Certificate of No Improvement (if applicable).
   • Original Owner's Duplicate Title.
   • Proof of payment of real property taxes (Official Receipt or Tax Clearance).

3. File ONETT Returns with BIR:

   • Submit BIR Form 1706 (CGT) and 2000-OT (DST) at the Revenue District Office (RDO) where the property is located.
   • For online filing, use the eBIRForms or eONETT system.
   • Pay CGT and DST at an AAB using Payment Form 0605.

4. Obtain eCAR from BIR: Issued after verification and payment confirmation, typically within 5-10 working days.

5. Pay Local Transfer Tax: Present eCAR to the LGU treasurer; payment is prerequisite for RD registration.

6. Register with Registry of Deeds: Submit all documents, pay registration fees, and obtain new title in buyer's name.

For sales involving corporations or non-residents, additional requirements like Corporate Secretary's Certificate or consularized documents apply.

Exemptions and Relief Measures

Certain sales are exempt from CGT under Section 27(D)(5) and related provisions:

• Principal Residence Exemption: If the seller uses proceeds to acquire a new principal residence within 18 months, CGT is waived (RR No. 13-99). Requires BIR certification.
• Socialized Housing: Sales below PHP 450,000 (adjusted annually) are exempt.
• Foreclosure Sales: Judicial foreclosures may defer CGT.
• Exchange for Shares: Tax-free if in a corporate reorganization (Section 40(C)(2)).

DST exemptions are rare but include government-to-government transfers.

Penalties for Non-Compliance

Failure to comply invites penalties under the NIRC:

• Surcharge: 25% for late filing/payment; 50% for willful neglect.
• Interest: 12% per annum (post-TRAIN rate) on unpaid amounts.
• Compromise Penalty: PHP 1,000 to PHP 50,000 depending on violation.
• Criminal Liability: For tax evasion, imprisonment of 1-10 years and fines up to PHP 100,000 (Section 255).

Additionally, without eCAR, the RD will not process title transfer, potentially voiding the sale or exposing parties to civil liabilities.

Special Considerations

• Installment Sales: CGT is prorated if payments span years (RR No. 17-2003).
• Non-Resident Sellers: Higher CGT rates (up to 15%) and mandatory withholding apply.
• Impact of TRAIN and CREATE Laws: Increased exemption thresholds and reduced rates for certain transactions.
• COVID-19 Extensions: Past BAYANIHAN Acts provided filing extensions, but as of 2023, standard deadlines apply.
• Audits and Assessments: BIR may audit within 3 years (or 10 for fraud), requiring retention of records.

Conclusion

Navigating taxes on property sales in the Philippines demands careful adherence to the NIRC and BIR regulations. The ONETT system streamlines the handling of CGT for capital asset sales, integrating filing and payment into a cohesive process rather than treating them as separate steps. By understanding the classification, exemptions, and procedural flow, taxpayers can avoid pitfalls and ensure compliant transactions. Consultation with a tax professional is advisable for complex cases to align with evolving revenue regulations.