Introduction

In the Philippines, the taxation of real property improvements is a nuanced area that intertwines national and local tax laws. “Improvements” on real property—defined under the National Internal Revenue Code (NIRC) and related jurisprudence—refer to all valuable additions made to land or buildings that enhance their value, utility, or extend their useful life. These improvements are subject to various tax implications, especially upon sale, transfer, or ownership. This article comprehensively explores the legal landscape governing taxes on real property improvements, focusing on capital gains tax (CGT), documentary stamp tax (DST), and local real property taxes (RPT).

I. Capital Gains Tax (CGT) on Real Property and Improvements

1. Nature of the Capital Gains Tax

Under Section 24(D) of the National Internal Revenue Code of 1997 (NIRC), as amended, a 6% Capital Gains Tax is imposed on the presumed gain from the sale, exchange, or disposition of real property located in the Philippines, classified as a capital asset. This includes both the land and its improvements.

If the real property with improvements is sold, the tax base is the higher of the gross selling price, fair market value as determined by the Commissioner, or the zonal value set by the Bureau of Internal Revenue (BIR).

2. Definition of "Improvements" in CGT

The term "improvements" encompasses buildings, structures, fixtures, and other constructions attached to the land. The BIR treats these as integral to the real property. Consequently, when a landowner sells a property with improvements, the transaction is viewed as a single sale of a capital asset. The total value—land and improvements combined—is subject to the 6% CGT.

However, if only the improvements are sold (without transfer of the land), the transaction may instead be subject to ordinary income tax, particularly when the seller is engaged in business (e.g., a developer or lessor). In that case, the property is treated as an ordinary asset, and the gain is taxed according to regular corporate or individual income tax rates.

3. Special Rules and Exemptions

Certain transfers are exempt from CGT, including:

Tax-free exchanges under Section 40(C)(2) of the NIRC (e.g., property-for-shares in corporate reorganizations);
Transfers to government under the power of eminent domain;
Principal residence sales by natural persons, under Section 24(D)(2), if the proceeds are fully utilized in acquiring or constructing a new principal residence within 18 months.

II. Documentary Stamp Tax (DST)

1. Overview

The Documentary Stamp Tax is imposed under Title VII of the NIRC, particularly Section 196, which levies a DST on deeds of sale, conveyance, or other instruments transferring ownership of real property.

2. Tax Base and Rate

DST is computed at the rate of ₱15 for every ₱1,000 or fractional part thereof of the consideration or fair market value of the property, whichever is higher. Like CGT, this covers both land and improvements.

3. Applicability to Real Property Improvements

When improvements are sold together with the land, a single DST applies to the entire transaction. However, when only the improvement is sold (such as a building erected on leased land), a separate DST is assessed based on the value of the improvement alone. The instrument evidencing such transfer (e.g., deed of sale of building) is subject to DST even if the land is not included.

4. Exemptions

DST exemptions may apply in specific cases, such as:

Transfers under the Comprehensive Agrarian Reform Law (CARL);
Tax-free exchanges under Section 40(C)(2);
Transfers pursuant to corporate reorganizations approved by the BIR.

III. Local Real Property Tax (RPT)

1. Legal Basis and Coverage

The Local Government Code of 1991 (Republic Act No. 7160) grants local government units (LGUs) the power to levy and collect an annual ad valorem tax on real property, including improvements.

Under Section 232, provinces, cities, and municipalities within Metro Manila may impose an RPT not exceeding:

1% of the assessed value for provinces; and
2% for cities and municipalities within Metro Manila.

2. Definition of “Improvements” under Local Taxation

Per Section 199(f) of the LGC, improvements include “all buildings, structures, machinery, and other property permanently attached to or forming part of the land.” This broad definition ensures that any enhancement increasing the property’s assessed value contributes to the RPT base.

The Provincial, City, or Municipal Assessor’s Office periodically reappraises both the land and improvements to determine their fair market value and corresponding assessed value, upon which the RPT is computed.

3. Assessment and Collection

Improvements are separately assessed from the land. For example, a newly constructed building increases the property’s total taxable value, triggering reassessment and corresponding increases in RPT obligations. Conversely, demolition or depreciation can lead to a reduced assessment.

Penalties for non-payment of RPT include:

Interest of up to 2% per month, capped at 36 months; and
Auction sale of the property after a year of delinquency.

4. Special Levies

Local governments may also impose additional levies on improvements, such as:

Special Education Fund (SEF) tax (1% of assessed value);
Idle Land Tax or Special Assessment for Public Works, as authorized under the LGC.

IV. Other Relevant Taxes and Considerations

1. Value-Added Tax (VAT)

If the seller is engaged in real estate business, the sale of land and improvements may be subject to 12% VAT instead of CGT. VAT applies to the gross selling price of ordinary assets (e.g., inventory of a developer), not capital assets.

2. Withholding Taxes

For ordinary assets, the buyer is generally required to withhold creditable withholding tax (CWT):

6% for individuals; or
1.5% / 2% / 5% depending on the classification of the seller and nature of transaction under BIR rules.

3. Leasehold Improvements

When a lessee constructs permanent improvements on leased property, ownership typically vests in the lessor upon lease termination. Such improvements may be subject to donor’s tax if ownership is gratuitously transferred without consideration, depending on the lease terms.

V. Conclusion

The taxation of real property improvements in the Philippines is governed by a complex interplay of national and local tax laws. Capital Gains Tax and Documentary Stamp Tax apply to the transfer or sale of real property and its improvements, while Real Property Tax covers their ownership and use. Proper tax classification—whether the property is a capital or ordinary asset—determines the applicable national taxes.

Property owners and developers must stay vigilant in assessing their tax obligations for land and improvements alike, ensuring compliance with the NIRC, BIR issuances, and local ordinances. Misclassification or underreporting may result in substantial penalties, surcharges, and even criminal liability under Philippine tax law.

This article is for informational purposes only and does not constitute legal advice. For specific cases or transactions, consultation with a tax lawyer or certified public accountant is recommended.