Are you familiar with the heavy Filipino drama teleserye in which two bloodline families argue over a plot of land they claim to have rights to due to inheritance from their deceased grandparents? The story may be difficult to depict, but if you’re a teleserye fan, you’ll understand what I’m talking about. The Filipino people are internationally recognized as a country of close family ties, but quarrels for property rights obtained through donation or inheritance are a different story. As complicated as it may sound, this transaction also includes a complicated obligation with which parties involved, whichever is your nationality, must comply known as “Transfer Taxes” in the Philippines.
Homonyms of Transfer Taxes will be discussed in this article. Homonyms are two words that have the same spelling but different meanings. In this case, “transfer taxes” are used in business taxation, where the government involved is the Bureau of Internal Revenue (BIR), and in real estate, where the Local Treasurer’s Office is involved with the transaction.
Transfer Tax in Business Taxation (BIR)
The methodologies and mechanics of acquiring ownership over other real property rights are unusually sophisticated. A person’s ownership can be gained, transferred, or lost in a variety of ways. The Philippines’ new civil code (NCC) defined a number of methods for acquiring ownership, which are as follows according to Art. 712:
- Ownership is acquired by occupation and by intellectual creation.
- Ownership and other real rights over property are acquired and transmitted by law, by donation, by testate and intestate succession, and in consequence of certain contracts, by tradition.
- Ownership may also be acquired by means of prescription
A transfer tax is an obligation imposed on the gratuitous disposition of private property or rights. It is a fee charged when property ownership or title is transferred from one individual or entity to another. Given that it is a gratuitous transfer, it shall impose no burden or require consideration from the recipient. In other words, payment from the receiver is not required because the giver or donor is acting voluntarily.
A transfer tax may be levied by the state, county, or municipality. It is not normally deductible from federal or state income taxes, but it can be added to the cost basis when calculating profit on the sale of securities and investment property. Some states classify transfer tax as an excise tax.
Furthermore, transfer taxes may be imposed on both the donor and the donee at the time of the donor’s death (Succession) or during his or her lifetime (Donation). If required, the estate-tax return must be filed within six months of the decedent’s death. Meanwhile, a donor’s tax is levied on the transfer of property by gift. If property, other than real property classified as capital assets, is transferred for less than an adequate and full consideration of money’s worth, a donor’s tax may be imposed. In this case, there will be a deemed gift that is taxable to the donor. If a tax return is required, the donor must file it within 30 days of the date the gift is made. Both estate and donor taxes must be paid when the return is filed.
Furthermore, the BIR may accept installment payments; however, the computation of estate tax must always consider the entire estate, and any amount paid after the due date is subject to a penalty. Extension is permitted but should not exceed five years if the estate is settled in court, or two years if the estate is settled extrajudicially through the execution of an extrajudicial settlement. Late payment of estate tax will result in a 25 percent to 50 percent surcharge, 20 percent interest per year, and a compromise penalty.
Transfer Tax in Real Estate (Local Treasurer’s Office)
Now, for the computation of paying the cost in registering a transfer certificate of title (TCT) or condominium certificate of title (CCT) in the standard setting in the Philippines the buyer is usually obligated to pay the following:
- Documentary Stamp Tax – 1.5% of the selling price or zonal value or fair market value, which ever is higher.
- Registration Fee – 0.25% of the selling price, or zonal value or fair market value, which ever is higher.
- Incidental and miscellaneous expenses incurred during the registration process.
- Transfer Tax – 0.5% of the selling price, or zonal value or fair market value, which ever is higher.
As illustrated on the fourth bullet above there is a transfer tax, but this termnilogy has a different concept. Now to define this tax, according to section 135 of the local government code (LGC)
“A province, city or municipality within the MMA may impose a tax on the sale, donation, barter, or any other mode of transferring ownership or title of real property at the rate of not more than 50% of 1% in the case of a province and 75% of 1% in the case of a city or a municipality in MMA of the total consideration involved in the acquisition of the property or of the FMV in case the monetary consideration involved in the transfer is not substantial, whichever is higher.
The sale, transfer or other disposition of real property pursuant to RA 6657 (Comprehensive Agrarian Reform Law of 1988) shall be exempt from the tax.”
While estate and donor’s taxes cover the transfer of any type of property, whether real or personal, the LGC transfer tax only applies to real property transfers. Furthermore, estate and donor’s taxes are essentially gratuitous transfers, but transfer tax under the LGC can be onerous because it can also be imposed on the sale or barter of real property. Transfer taxes under the NIRC are typically paid at the Regional District Office of the Bureau of Internal Revenue where the decedent or donor resides. Transfer tax, on the other hand, must be paid at the Treasurer’s Office where the property is located under the LGC.
The payment deadline is sixty (60) days from the date of the deed’s execution or the date of the decedent’s death. Please keep in mind that notaries public are required to provide a copy of any deed transferring ownership or title to any real property to the provincial treasurers within thirty (30) days of the date of notarization. In case of non-compliant, the penalties and surcharges shall be:
- Surcharge – No more than twenty-five percent (25%) of the amount of unpaid taxes, fees, or charges.
- Penalty – No more than two percent (2%) per month of unpaid taxes, fees, or charges, including surcharges, until such amount is fully paid, but not more than thirty-six (36) months or 72 percent (72%)
Invest in the Future with Bria Homes
Real estate is one of the best investments you can make for your family. It is certain to appreciate in value over time, and your sons, daughters, or grandchildren will undoubtedly benefit from it. To avoid future conflict, it is recommended that a last will and testament be prepared so that you can decide who gets what with the properties you leave behind. Bria Homes can assist you in providing a comfortable place for your family to live, with affordable real estate offers ranging from condominiums to house and lot everything we can offer will surely make them feel that you are still with them even in times of death.