Taxes Involved in the Transfer of Land through Sale in the Philippines: Obligations of Buyer and Seller

Introduction

In the Philippines, the sale and transfer of land ownership is a regulated process governed primarily by the Civil Code of the Philippines (Republic Act No. 386), the Tax Code (National Internal Revenue Code of 1997, as amended by Republic Act No. 10963 or the TRAIN Law, and subsequent amendments), local government ordinances under the Local Government Code (Republic Act No. 7160), and rules from the Bureau of Internal Revenue (BIR), the Registry of Deeds, and local treasurers' offices. The transfer involves executing a Deed of Absolute Sale (or similar instrument), paying applicable taxes and fees, and registering the deed to effect the change in title.

Taxes on land transfers serve multiple purposes: generating revenue for the government, discouraging speculative real estate practices, and ensuring compliance with fiscal policies. These taxes can be categorized into national taxes (administered by the BIR) and local taxes (administered by cities or municipalities). Additional fees, such as registration and notarial costs, are also incurred.

The key principle is that taxes are computed based on the higher of the gross selling price (as stated in the deed), the zonal value (set by the BIR), or the fair market value (as per local assessors). Parties can negotiate who bears which costs, but legal defaults often assign specific obligations to the seller or buyer. Non-payment can result in delays in title transfer, penalties, or even nullification of the sale.

This article comprehensively covers all aspects of taxes in land sales, including computation, payment procedures, exemptions, and responsibilities of buyers and sellers, within the Philippine legal framework.

Overview of the Transfer Process

The land sale process typically includes:

Agreement and Execution: Buyer and seller agree on terms, execute a Deed of Absolute Sale (notarized).
Tax Clearance and Payment: Obtain BIR Certificate Authorizing Registration (CAR) after paying national taxes; pay local transfer tax.
Registration: Submit documents to the Registry of Deeds for annotation on the title.
Title Issuance: New Transfer Certificate of Title (TCT) issued in the buyer's name.

Taxes must be paid within specific timelines: national taxes generally within 30 days from notarization, local taxes before registration.

Failure to comply can lead to surcharges (25% or 50%), interest (12% per annum under TRAIN Law amendments), and compromises.

National Taxes Administered by the Bureau of Internal Revenue (BIR)

National taxes are mandatory for all land sales and are paid to secure the CAR, which is required for registration.

1. Capital Gains Tax (CGT)

Legal Basis: Section 24(D) and 27(E) of the National Internal Revenue Code (NIRC), as amended.
Applicability: Imposed on the seller's gain from the sale of real property classified as a capital asset (not used in trade or business). If the property is an ordinary asset (e.g., for developers or habitual sellers), it is subject to regular income tax instead (progressive rates up to 35% for individuals, 25% for corporations post-CREATE Law or RA 11534).
Rate: 6% final tax on the gross selling price, current fair market value (zonal value), or assessed value, whichever is highest.
Computation Example: For a land sold at PHP 5,000,000 with a zonal value of PHP 6,000,000, CGT = 6% × PHP 6,000,000 = PHP 360,000.
Who Pays: Seller (individual, estate, trust, or corporation). If the seller is a non-resident alien, rates differ (up to 25%).
Payment Procedure: File BIR Form 1706 (for individuals) or 1707 (for corporations) within 30 days from sale; pay at an authorized bank.
Exemptions:
- Principal residence sold and proceeds used to buy/build a new one within 18 months (BIR Ruling required; escrow of tax until compliance).
- Sales below PHP 100,000 (de minimis).
- Exchanges under Section 40(C)(2) for corporate reorganizations.
- Involuntary sales (e.g., expropriation).
Special Rules: For installment sales, tax is prorated if initial payments ≤25% of price. Habitual sellers (more than 3 sales in 12 months) may be reclassified.

2. Documentary Stamp Tax (DST)

Legal Basis: Section 196 of the NIRC, as amended.
Applicability: Levied on the Deed of Sale or any instrument transferring real property.
Rate: 1.5% (PHP 15 per PHP 1,000) on the higher of selling price or zonal value.
Computation Example: For the same PHP 6,000,000 value, DST = 1.5% × PHP 6,000,000 = PHP 90,000.
Who Pays: Conventionally the seller, but negotiable (often stipulated in the contract).
Payment Procedure: Affix stamps or pay via eDST system; file BIR Form 2000-OT within 5 days after the close of the month of execution.
Exemptions: Transfers by government entities, foreclosures (if redeemed), or certain mergers.

3. Value-Added Tax (VAT)

Legal Basis: Section 106 of the NIRC, as amended by TRAIN Law.
Applicability: Only if the seller is VAT-registered (e.g., real estate dealers) and the sale exceeds PHP 3,199,200 (threshold adjusted annually). Not applicable to ordinary individuals selling non-business property.
Rate: 12% on the gross selling price (output VAT), less input VAT credits.
Computation: VAT = 12% × selling price (if applicable).
Who Pays: Seller collects from buyer and remits to BIR.
Payment Procedure: Included in quarterly VAT returns (BIR Form 2550Q).
Exemptions: Sales of residential lots ≤PHP 1,919,500 or house/lot ≤PHP 3,199,200; socialized housing.

4. Creditable Withholding Tax (CWT) or Expanded Withholding Tax (EWT)

Legal Basis: Revenue Regulations No. 2-98, as amended.
Applicability: If buyer is in the top 20,000 corporations or government, they withhold tax on the purchase.
Rate: 1% to 15% depending on seller type (e.g., 6% if seller is not habitually engaged).
Who Pays/Withholds: Buyer withholds and remits; creditable against seller's income tax.
Procedure: File BIR Form 2307.

Local Taxes Administered by Local Government Units (LGUs)

Local Transfer Tax (LTT)

Legal Basis: Section 135 of the Local Government Code (RA 7160).
Applicability: Imposed on the sale, barter, or transfer of real property.
Rate: Up to 50% of 1% (0.5%) in provinces; up to 75% of 1% (0.75%) in cities/Metro Manila (e.g., Quezon City at 0.75%).
Computation: Based on higher of selling price or assessed value.
Who Pays: Negotiable, but customarily the buyer (as they benefit from the transfer).
Payment Procedure: Pay at city/municipal treasurer's office; obtain clearance before registration. Must be paid within 60 days from execution.
Exemptions: Transfers to government, inheritance (but estate tax applies separately), or certain donations.

Other Fees and Costs

1. Registration Fees

Legal Basis: Administrative Code and PD 1529 (Property Registration Decree).
Rate: Graduated scale (e.g., PHP 8,796 for first PHP 1,700,000, plus increments).
Who Pays: Buyer.
Procedure: Paid at Registry of Deeds upon filing.

2. Notarial Fees

Rate: PHP 200–500 plus 2% of property value.
Who Pays: Shared or as agreed.

3. Assessor's Fees and Other Incidentals

Includes certification fees (PHP 100–500), IT fees for e-titles.

Allocation of Responsibilities: Buyer vs. Seller

While negotiable via contract, standard practices are:

Seller's Obligations:
- Capital Gains Tax (mandatory on seller).
- Documentary Stamp Tax (primary responsibility).
- VAT (if applicable).
- Any withholding taxes remittance.
- Clearing liens/mortgages on the property.
Buyer's Obligations:
- Local Transfer Tax.
- Registration fees.
- Notarial fees (often shared).
- Ensuring due diligence (title verification via RD).

In practice, sellers may shift costs to buyers by adjusting the selling price. Contracts should specify allocations to avoid disputes.

Exemptions, Incentives, and Special Cases

Exemptions:
- Government-to-government transfers.
- Sales under Comprehensive Agrarian Reform Program (CARP).
- Certain ecozone properties under PEZA incentives.
Incentives:
- Reduced rates for socialized housing (RA 7279).
- Tax holidays for BOI-registered projects.
Special Cases:
- Inheritance/Donation: Subject to estate/donor's tax (6% flat rate post-TRAIN), not CGT.
- Corporate Sellers: May opt for 6% CGT or 30% (now 25% post-CREATE) income tax on net gain.
- Installment Sales: Deferred tax payment.
- Foreclosures: Buyer (bank) pays taxes on subsequent sale.
- Condominium Units: Similar rules, but include common areas.

Penalties for Non-Compliance

BIR Penalties: 25% surcharge for late filing, 50% for willful neglect; 12% interest p.a.; compromise fees up to PHP 50,000.
LGU Penalties: Additional 2% monthly interest, up to 72%.
Civil/Criminal: Fraud can lead to imprisonment (2–6 years) under NIRC.
Title Issues: No CAR means no registration; buyer may sue for breach.

Recent Developments and Considerations

As of 2025, amendments under the CREATE Law (2021) reduced corporate tax rates, impacting real estate firms. TRAIN Law (2018) simplified CGT to flat 6% and adjusted thresholds. Proposals for property tax reforms (e.g., Real Property Valuation and Assessment Reform Act or RA 12001, signed 2024) aim to standardize valuations, potentially affecting computations. Parties should consult BIR rulings or Revenue District Offices for case-specific advice, as jurisprudence (e.g., Supreme Court cases like CIR v. Fort Bonifacio) clarifies interpretations.

In conclusion, land transfer taxes ensure fiscal accountability but can be complex. Engaging lawyers, accountants, or real estate professionals is advisable to navigate obligations and minimize costs. This framework promotes transparent and efficient property transactions in the Philippines.