Real estate buyers, beware

Q. "I have been working as an employee for a manufacturing company for quite some time now. Through the years, I have saved bit by bit of what I can salvage from my humble salary. Now, I plan to purchase a vacant lot adjacent to my house and owned by my neighbor.

"My neighbor advised me that certain taxes have to be paid before he can transfer the title to the property under my name. Can you clarify which taxes I should be paying and those which my neighbor should pay?

A. You certainly deserve a pat on the back for exercising prudence in your intended purchase. The tax implications of the sale of land depend on several factors such as the nature of the land being sold. Real estate may be classified as ordinary asset or as capital asset. In simple terms, ordinary assets refer to those that are primarily held for sale to customers by the seller in the ordinary course of his trade or business. All others may generally be classified as capital assets.

In this, I assume that your neighbor is not engaged in the real estate business. As such, the land he is selling to you is a capital asset.

Where the land being sold is classified as a capital asset, the seller will be subject to the final capital gains tax of 6%, based on the gross selling price, the zonal value (or the value of certain real properties as determined and published by the Bureau of Internal Revenue), or the valuation of the provincial or municipal assessor (the market value of the property as indicated in the tax declaration certificate), whichever is higher. The said final tax is required to be withheld by the buyer from his payments. Let me make this clear that the 6% CGT is not a tax obligation of the buyer; the buyer is only required to remit this to the BIR on behalf of the seller.

Since you are an individual buyer not engaged in trade or business, if your payments in the year of sale do not exceed 25% of the selling price, the withholding of the 6% CGT shall be made on the last installment or immediately prior to such last installment (if the last installment is not sufficient to cover the tax due) until the tax is fully paid.

Where payments in the year of sale exceeds 25% of the selling price, the withholding of the full amount shall be made on the first installment.

In any case, no certificate authorizing registration/tax clearance certificate shall be issued to the buyer unless the withholding tax due on the sale, transfer, or exchange of real property has been fully paid.

In addition, the conveyance of real property is also subject to the documentary stamp tax of P15 for every P1,000 (or a fractional part) of the gross selling price, the zonal value, or the valuation of the provincial or municipal assessor, whichever is higher. Either party may pay the DST. Thus, the buyer and the seller should agree on who should shoulder its payment. However, where one party is exempt from the DST, the other party who is not exempt shall be the one directly liable for the tax.

Finally, the sale of land, whether capital or ordinary, will also be subject to the local transfer tax at the rate of not more than 50% of 1% of the selling price or the assessed/market value as indicated in the prevailing schedule of market values prepared by the assessor office in the locality where the property is located, whichever is higher. It is the duty of the seller to pay the local transfer tax within 60 days from the date of the execution of the deed of sale.

Yes, I know. They threw everything but the proverbial kitchen sink. It’s quite a tall order to follow these rules. But until a less complicated set of guidelines is adopted, it is advisable to take note of them. However, nothing will prevent the parties to stipulate in their contract as to who will bear all these costs and taxes. What is important is for all these mandatory costs to be paid the proper authorities. Good luck on your purchase!

(Raymund S. Gallardo is tax partner of Laya Mananghaya & Co./KPMG. Questions and comments are welcome. Messages to the author can be sent by e-mail at [email protected]).