Are you planning to sell or buy a house? Buying or selling a house is subject to several forms of taxes which need to be paid or fulfilled for the transfer of title. Be in the know of these taxes and possible exemptions.
What are these taxes?
- 6% Capital Gains Tax
- 1.5% Documentary Stamp Tax
- 3/4% Transfer Tax (cities and municipalities) 1/2% Transfer Tax (provinces)
- Withholding Tax and Value Added Tax for ordinary assets
Let’s focus this discussion on Capital Gains Tax including the grounds for exemption.
What is Capital Gains Tax or CGT?
CGT is a tax imposed on the gains presumed to have been realized by the seller from the sale, exchange or other disposition of real property located in the Philippines, classified as capital assets (ex. one’s residence).
For the purpose of this discussion:
Capital Assets refer to all real properties held by a taxpayer whether or not connected with his trade or business and which are not considered as ordinary assets.
Ordinary Assets on the other hand consist of the following:
- Products of the trade or business, stocks of trade
- Used in the ordinary course of business
How do you compute for the Capital Gains Tax?
Highest amount among: Selling Price / Zonal Value (by the Commissioner) / Fair Market Value (by the Assessor) / Selling Price as Fair Market Value
6% (Tax Rate)
Capital Gains Tax Payable/Due
Who pays the Capital Gains Tax?
CGT shall be shouldered by whoever was designated in the contract of agreement or deed of sale but it’s usually on the account of the seller, especially if the agreement is silent.
Who must file the return?
Everyone, including estates and trusts who/which sell, exchanges or disposes real property located in the Philippines classified as capital assets must the BIR Form No. 1706.
When to file?
Within 30 days after each sale or disposition of real property. In case of installment sale, the return shall be filed within 30 days after each installment payment.
Where to file?
File the BIR Form No. 1706 in triplicate (two copies for the BIR and one copy for the taxpayer) with the Authorized Agent Bank (AAB) in the Revenue District where the property is located. In places where there are no AAB, the return will be filed directly with the Revenue Collection Officer or Authorized City or Municipal Treasurer.
One-Time Transaction (ONETT) taxpayers shall mandatorily use the eBIRForms in filing all of their tax returns. They may opt to submit their tax returns manually using the eBIRForms Offline Package in the RDO where the property is located or electronically through the use of the Online eBIRForms System. (*source BIR Website)
What will you get for paying and filing?
A Certificate Authorizing Registration issued by the Commissioner of BIR or his duly authorized representative attesting that the transfer of land, buildings and improvements arising from sale, barter or exchange have been reported and the taxes due have all been fully paid. This certificate will facilitate the registration of the title transfer.
CONDITIONS FOR EXEMPTION FROM CAPITAL GAINS TAX
- Seller/owner is a natural person and the subject property is his principal residence. (Corporations not qualified)
What are considered as principal residences?
It is “the dwelling house, including the land on which it is situated, where thw husband and wife or an unmarried individual, whether or not qualified as head of the family, and members of his family reside”. In cases where the owner of the land is different from the owner of the house in which it stands and the house owner only leases the land in which his house stands, only the house will be treated as principal residence even if they jointly sell the real property. In cases where the owners of the real property (land and house) are the heirs through hereditary succession, the properties will be considered as principal residence of the co-owners, including their family members actually occupying and using the same properties as permanent residence. The exemption shall apply only to the extent of their proportionate share in the value of the properties as co-owners.
- The proceeds of the sale shall be fully utilized for the construction or acquisition of a new principal residence of the seller. Unutilized portion of the proceeds of the sale shall be subject to capital gains tax.
- Acquisition or construction of new principal residence shall be done within 18 months from date of sale.
- The historical cost or adjusted basis of the property sold shall be carried over to the new principal residence acquired or constructed. If no full or partial utilization of the proceeds of the sale within the 18-month period, the portion of the gain presumed to have been realized from the sale shall be subject to the 6% CGT.
- The BIR Commissioner shall be notified through a prescribed return (BIR Form No. 1706) within 30 days from date of sale of the intention to avail of this tax exemption.
- This exemption can be availed of only once in every 10 years.
REQUIREMENTS FOR EXEMPTION
- Duly accomplished BIR Form No. 1706.
- Proof of payment of the 1.5% Documentary Stamp Tax.
- A sworn statement from Barangay Chairman or Building Administrator in case of a condominium unit stating that his principal is within the jurisdiction of that barangay and has been his principal residence as of the date of sale
- A duplicate original copy of the deed of conveyance of his principal residence
- Photocopy of the Transfer Certificate of Title (CTC) or Condominium Certificate of Title (CCT) in case of condo unit.
- Latest tax declaration of the subject principal residence.
- A sworn statement that the total proceeds from the sale of his old principal residence has been actually used in the acquisition or construction of his new principal residence. If the construction is still in progress, as sworn statement from his architect or engineer, or both, that the amount shall be utilized fully for the construction of his new principal residence.
- A certified statement from his architect or engineer, or both, showing the cost of materials and labor for the construction of the new principal residence.
- A certified copy of the building permit issued by the Office of the Building Official of the city or municipality where the new principal residence shall be constructed including the building specification plan, construction plans and cost estimates.
- In case of purchase of the new principal residence, a duplicate original copy of the Deed of Absolute Sale.
The buyer shall withhold from the seller the 6% CGT which shall be deposited in cash or manager’s check in an interest-bearing account with an Authorized Agent Bank (AAB) to effect that the amount deposited together with all the interests it will yield shall only be released to the seller upon certification by the RDO that the proceeds of sale has been utilized in the acquisition or construction of the new principal residence within 18 calendar months from the date of sale. The date of sale refers to the date of notarization of the document evidencing the sale.
The buyer and the seller shall jointly file the BIR Form No. 1706 (with both their addresses) within 30 days from the date of sale within the RDO which has the jurisdiction over the property with no computed tax due stating that the said amount was withheld by the buyer and is being maintained in an escrow account.
If within 30 days after the lapse of the 18-month period, the seller fails to show evidence that he has fully the utilized the proceeds of sale to acquire or construct his new principal residence, he shall be treated as a delinquent taxpayer and shall be accordingly assessed for deficiency capital gains tax, inclusive of the 25% surcharge and 20% interest per annum computed from the 31st day after the date of sale.
The escrow account shall be used until all tax liabilities are fulfilled. In case, the escrow account is insufficient to cover all due taxes, the seller shall still be liable for all tax payable. If the escrow account is excessive, all excess shall be returned to the seller. This case shall follow due process with required notices.
Equipped with the above guidelines, I hope that you are no longer clueless when it comes to capital gains tax. I also hope that you would be able to use this new knowledge rightfully and at your own advantage. In the world of Finance, knowledge is truly a power.
Good weekend to all!