Taxes Paid by the Seller in Philippine Real Estate Transactions

Introduction

In the Philippine real estate market, the sale of property involves various fiscal obligations that fall primarily on the seller. These taxes ensure compliance with national revenue laws and local ordinances, contributing to government coffers while regulating property transfers. Under the Tax Code of the Philippines (Republic Act No. 8424, as amended by the TRAIN Law or Republic Act No. 10963 and subsequent reforms), sellers of real property are liable for specific taxes calculated based on the transaction's value. This article provides a comprehensive overview of the taxes imposed on sellers, including their legal bases, computation methods, exemptions, payment procedures, and related administrative requirements. It focuses exclusively on the Philippine context, drawing from relevant statutes, Bureau of Internal Revenue (BIR) regulations, and jurisprudence.

The primary taxes paid by the seller include Capital Gains Tax (CGT), Documentary Stamp Tax (DST), and Local Transfer Tax (LTT). Additional considerations arise for Value-Added Tax (VAT) in certain cases, as well as potential withholding taxes and other fees. Failure to pay these taxes can result in penalties, interest, and delays in property title transfer.

Capital Gains Tax (CGT)

Legal Basis

Capital Gains Tax is imposed under Section 24(D) of the National Internal Revenue Code (NIRC) on the presumed gain from the sale or exchange of capital assets, including real property classified as such. Real property is generally considered a capital asset unless it is held as inventory by dealers or developers. The tax applies to individuals, estates, trusts, and corporations, with variations in rates and applications.

Rate and Computation

The CGT rate is a flat 6% based on the higher of:

• The gross selling price (as stated in the Deed of Sale), or
• The fair market value (FMV), which is the higher of the zonal value set by the BIR or the assessed value determined by the local assessor's office.

For example, if a property sells for PHP 5,000,000 but has a zonal value of PHP 6,000,000, CGT is computed as 6% of PHP 6,000,000, equaling PHP 360,000.

No deductions for actual costs or improvements are allowed in the computation, as it is a presumed gain tax. However, for corporate sellers, CGT may be integrated into income tax computations if the property is an ordinary asset.

Exemptions and Special Rules

Several exemptions mitigate the CGT burden:

• Sale of Principal Residence: Under Revenue Regulations (RR) No. 13-99, as amended, the sale of a principal residence is exempt if the proceeds are used to acquire or construct a new principal residence within 18 months. The seller must notify the BIR via a sworn declaration and escrow the CGT amount until proof of reinvestment is provided. The exemption is limited to one transaction per lifetime per taxpayer.
• Exchanges Under Section 40(C)(2): Tax-free exchanges for corporate reorganizations or property-for-shares swaps, subject to BIR confirmation.
• Sales to Government: Exempt if for public use, but the seller may opt for standard taxation.
• Threshold for Low-Value Properties: No specific threshold exemption, but properties sold below PHP 100,000 may have minimal tax implications in practice.
• Non-Resident Aliens and Foreign Corporations: Subject to the same 6% rate, but with additional withholding requirements.

For foreclosed properties or dacion en pago (payment in kind), CGT still applies unless exempted under specific banking laws.

Payment and Compliance

CGT must be paid within 30 days from the notarization of the Deed of Sale using BIR Form 1706. The seller files this with the Revenue District Office (RDO) where the property is located. A Certificate Authorizing Registration (CAR) is issued by the BIR upon payment, which is essential for title transfer at the Registry of Deeds.

Penalties for late payment include a 25% surcharge, 12% annual interest, and potential compromise fees.

Documentary Stamp Tax (DST)

Legal Basis

DST is levied under Section 196 of the NIRC on documents, instruments, and papers evidencing the sale or transfer of real property. It serves as a tax on the privilege of executing such documents.

Rate and Computation

The rate is 1.5% (or PHP 15 per PHP 1,000) of the higher of the gross selling price or FMV (zonal or assessed value). Using the earlier example, for a PHP 6,000,000 basis, DST amounts to PHP 90,000.

DST is typically borne by the seller but can be negotiated in the contract to be shared with the buyer.

Exemptions and Special Rules

Exemptions include:

• Transfers to government entities or for public purposes.
• Intra-family transfers (e.g., donations between spouses or parents and children), though these may trigger donor's tax instead.
• Foreclosures where the mortgagee is a bank, under certain conditions per RR No. 4-2000.
• Sales of socialized housing under Republic Act No. 7279 (Urban Development and Housing Act), capped at low values.

For lease contracts with option to purchase, DST applies only upon exercise of the option.

Payment and Compliance

DST is paid via BIR Form 2000 within five days after the close of the month of notarization. It can be paid through authorized agent banks or e-filing. Proof of payment is required for CAR issuance.

Non-payment can lead to document invalidity in court and penalties similar to those for CGT.

Local Transfer Tax (LTT)

Legal Basis

LTT is authorized under Section 135 of the Local Government Code (Republic Act No. 7160), allowing provinces, cities, and municipalities in the Metropolitan Manila Area to impose a tax on real property transfers.

Rate and Computation

Rates vary by locality but are capped at:

• 0.5% for provinces.
• 0.75% for cities and municipalities in Metro Manila.

The tax is based on the higher of the gross selling price or FMV. For instance, in Quezon City, it's 0.75% of the basis.

Exemptions and Special Rules

Exemptions mirror national ones, including government transfers and socialized housing. Some LGUs offer incentives for eco-friendly developments or heritage properties.

Payment and Compliance

LTT is paid to the local treasurer's office within 60 days from notarization. A tax clearance certificate is issued, necessary for title registration. Delays incur surcharges and interest per local ordinances.

Value-Added Tax (VAT) Considerations

Legal Basis

Under Section 106 of the NIRC, VAT applies at 12% if the seller is VAT-registered and the property is an ordinary asset (e.g., for real estate dealers or habitual sellers).

Rate and Computation

VAT is 12% of the gross selling price, but input VAT credits may reduce the net payable. For non-VAT-registered sellers or capital asset sales, no VAT applies—instead, CGT suffices.

Threshold: Annual gross sales exceeding PHP 3,000,000 require VAT registration.

Exemptions and Special Rules

• Sales of residential lots PHP 1,500,000 or below, or house and lots PHP 2,500,000 or below, are exempt.
• Lease of residential units with monthly rent PHP 15,000 or below is exempt, but sales are not.
• For installment sales, VAT is prorated.

If VAT applies, it replaces CGT for ordinary assets.

Payment and Compliance

Filed quarterly via BIR Form 2550Q, with monthly remittances if applicable.

Other Taxes and Fees

Creditable Withholding Tax (CWT)

Under RR No. 2-98, as amended, buyers withhold 1.5% to 6% CWT from the selling price if the seller is habitually engaged in real estate. This is creditable against the seller's income tax but is effectively a prepayment borne by the seller.

Donor's Tax or Estate Tax

If the transfer is via donation or inheritance, donor's tax (6% under TRAIN Law) or estate tax applies instead of CGT/DST.

Registration and Notarial Fees

Sellers often shoulder notarial fees (around 1-2% of selling price) and BIR processing fees for CAR (PHP 100-500). Registry of Deeds fees (0.25% of value) are typically buyer's, but negotiable.

Corporate Sellers

Corporations pay CGT at 6%, but if the property is ordinary, it's subject to regular corporate income tax (25% as of CREATE Law or Republic Act No. 11534). Minimum Corporate Income Tax (MCIT) may apply if no profit.

Administrative Procedures and Documentation

To complete a sale:

1. Secure Tax Clearance from local assessor.
2. Pay CGT, DST, and LTT.
3. Obtain CAR from BIR.
4. Register Deed of Sale at Registry of Deeds.
5. Update title.

Required documents: Deed of Absolute Sale, Tax Declarations, Certificates of No Improvement (if applicable), and proof of payments.

Penalties and Remedies

Non-compliance triggers:

• Surcharge: 25% (50% for willful neglect).
• Interest: 12% per annum.
• Compromise fees: Up to PHP 50,000.
• Criminal penalties for tax evasion under Section 255 of NIRC.

Taxpayers can avail of Voluntary Assessment and Payment Program (VAPP) or compromise settlements.

Jurisprudential Insights

Court rulings, such as in CIR v. Primetown Property Group, Inc. (G.R. No. 162155, 2007), clarify that zonal values prevail over selling price for tax bases. In Fort Bonifacio Development Corp. v. CIR (G.R. No. 158885, 2008), the Supreme Court upheld VAT on installment sales.

Conclusion

The taxes paid by sellers in Philippine real estate transactions form a structured framework to ensure fiscal responsibility and equitable revenue generation. By understanding CGT, DST, LTT, and potential VAT, sellers can navigate compliance efficiently, leveraging exemptions where applicable. Proper planning, including tax-efficient structuring like principal residence exemptions, can significantly reduce liabilities.