Been saving for too long to buy a new home? You might need to save a little more to make up for the so-called hidden costs of buying a house so you won’t be surprised in the future. The journey in achieving your dream of owning a house and lot can take a while, but it’s all worth the wait, don’t lose hope. When buying real estate in the Philippines, you have to put together an amount that is greater than the property’s price because the price of the property itself isn’t the only cost you will pay, it comes with other fees and taxes. They are so-called hidden costs because they’re usually not mentioned not until the transaction begins. Although some costs are to be shouldered by the seller, still there are other fees for the buyer to pay.
To help you prepare financially for the hidden costs of owning a home, like if you’re planning to buy your dream house and lot from BRIA Homes, below are some of the additional charges involved in real estate. However, keep in mind that the list below is just a general guide and the total cost of acquiring real estate will vary depending on the circumstances involved in the transaction, such as how you finance your property will matter, in order to help you get your finances ready. It is still best for your interest to consult with professionals to get a bit more accurate and professional advice.
Here’s the list of the most common hidden costs of buying a house:
- Earnest money
It is customary that sellers ask for a security deposit, which is also called earnest money. The buyer pays the earnest money as to demonstrate his or her eagerness or serious interest in buying the real property. It is asked by the seller prior to the conclusion of any deals, it is similar to a reservation fee, however, the latter applies more to the purchase of pre-selling projects. Further, it also puts the real property on hold from other interested buyers until all terms and conditions are agreed upon by the parties. The earnest money shall also form part of the purchase price in consonance with the law on sales in the Philippines. When the buyer and seller sign an earnest money agreement of contract to sell, they are legally bound to consummate the contract to sell and buy the subject property based on the terms of their agreement. At present, there is no hard and fast rule regarding the amount of earnest money. The amount is oftentimes negotiated between the buyer and seller, including the refund terms in case the buyer won’t pursue buying the property.
- Due diligence expenses
As the name implies, due diligence is thorough research and investigation of the property that is offered for sale. It serves as the buyer’s protection against any potential fraud. The research includes costs for title tracing, traveling expenses, and payment for out-of-town inspections, in short, costs for verifications of the real property. It is better to be a hundred percent sure of the legitimacy of the property and accuracy of stated information before entering into a contract than be sorry later on.
- Capital gains tax (CGT) or creditable withholding tax (CWT)
Capital gains tax is the kind of tax that the seller needs to pay for any transaction relating to the sale of real estate properties that are categorized as capital assets, such as residential properties if the seller is not habitually engaged in real estate business. The amount of tax ranges around six percent (6%) of the property’s gross selling price or its fair market value, whichever is higher. However, this is subject to an exemption if the seller, is doing away with his principal residence and plans to use the proceeds of the sale to build or purchase a new property to be used as his or her principal residence within 18 months of the date of sale, then the seller is exempt from paying such tax, with the caveat that the exemption may be availed only once every 10 years.
On the other hand, if the seller is habitually engaged in selling real estate, such as when the transaction involves the sale, transfer, or exchange of real property considered as ordinary assets, then a creditable withholding tax (CWT) is imposed on him or her. The rates of creditable withholding tax range from 1.5% to 6%, depending on the selling price of the property and if the seller is not habitually engaged in real estate. There is an exemption again, if the sale involves socialized or low-cost housing, then the seller is exempted from paying the creditable withholding tax.
Compared to capital gains tax which is considered a final tax, creditable withholding tax is only an initial task that will be included and adjusted according to the annual total income of the sellers’ business, and which is subjected to corporate income tax. For instance, for a P5 million sale, six percent amounts to P300,000.
- Documentary stamp tax (DST)
This kind of tax is imposed by the Bureau of Internal Revenue (BIR) on the privilege of entering into some transactions through the execution of documents, such as the sale or of real property, conveyances, and donations, issuance or transfer of shares of stock, among others. The documentary stamp tax rate ranges from 1.5% or P15 for every P1,000 or fraction thereof of the selling price or zonal value or fair market value, or whichever is higher. So for instance, for a P5 million sale, this amounts to P75,000.00. It is paid by the person making, signing, issuing, accepting, or transferring the documents, which is the buyer, because he shoulders the cost of registration. The importance of stamping a taxable document, such as Deeds of sale and conveyances of real property, is that it serves as evidence that the sale transaction has been entered into and can be admissible in court when things go sour. However, failure to stamp a taxable document shall not invalidate the same.
- Value added tax (VAT)
The Value Added Tax (VAT) is the tax imposed on the sale, barter, exchange, or lease of properties and other services. This tax is currently rated at 12 percent (12%) and is normally passed on to the buyer. Those individuals who are buying a property to serve as an investment and not to be used for low-cost or socialized housing are subjected to a 12 percent (12%) VAT of the selling price of the property. With the exception of the sale of residential houses with prices of not more than P3,199,200 in accordance with the recent laws relating to tax such as the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law and the Tax Reform for Acceleration and Inclusion (TRAIN) Law.
- Notary Fee
The Deed of Absolute Sale between the parties must be notarized. Notarization is important because the notary acts as a witness to the transaction, which helps in avoiding any identity theft-related document fraud. Moreover, if the deed of sale is not notarized, it cannot be considered a public document but merely a private one and thus, cannot bind the third person. Nevertheless, it is valid between the parties. Further, the notarization fee is considered one of the hidden costs of buying a house because it requires a fee of about 1-2% of the property value or property’s selling price upon consummation of the sale.
The Deed of Absolute Sale is a legal document that serves as proof that both parties in the contract have fulfilled their respective duties and obligations, to which the transaction can already be considered closed. So for instance, when the buyer pays the seller the amount needed on a certain piece of land, it is now the seller’s obligation to issue a Deed of Absolute Sale of land as proof that the buyer already paid what is due and is given the ownership and other legal rights to the said property.
When should you notarize the Deed of Absolute Sale
First, the Deed of Absolute Sale should be prepared as soon as the payment is made and then taken to a notary public for notarization. However, prior to executing such a legal document, on the part of the seller, the taxes due must first be settled, such as the capital gains tax if applicable. On the other hand, the buyer should settle first the other underlying taxes such as the required transfer tax, documentary stamp tax, and all other dues related to the registration process alongside paying the purchase price of the land.
- Transfer tax
As the name implies, it is a kind of tax that is imposed on transferring or through any other modes, such as donation or sale, of ownership of real property. The rate varies from 0.5 percent (0.5%) to 0.75 percent (0.75%) of the zonal value or selling price of the real estate, whichever is higher and depending on the location where the property is situated. The variation is attributed to the differences in the tax ordinances passed by local governments. It is highly advised that the buyer should consult with the City or Municipal Treasurer to determine the exact transfer tax that he or she needs to pay.
- Registration fee.
One of the hidden costs of buying a house that a buyer should be aware of is the registration fees. This fee refers to the cost that the buyer has to pay to the local Registry of Deeds where the real estate is located. The registration fee must be paid for the registration of a deed of sale, donation, partition, or any other conveyance and transfer of ownership of real property. It is paid upon paying taxes on the sale of the property and after securing the Certificate Authorizing Registration (CAR) and Tax Clearance (TCL) from the Bureau of Internal Revenue. Bear in mind that after obtaining CAR and TCL from BIR, it should be presented within two (2) years from issuance to the Register of Deeds, or else it shall be null and void or have no effect and you will need to request again for the issuance of a new CAR, in accordance with the issuance of Revenue Memorandum Order (RMO) No. 23-2010 dated March 15, 2010.
The fee depends on whether the amount is above or below P1.7 million. If the purchase price is more than one million seven hundred thousand pesos (P1.7 million), then the fee can be found on the Land Registration Authority’s website in their Registration Fee table. So if the selling price of the property amounts to two million pesos (P2 million), then an additional ninety pesos (P90.00) will be included for every twenty thousand pesos (P20,000.00) or fraction thereof; in excess of the P1.7 million, in addition to the fee of 8,796. Hence, the registration fee would be P10,146. [Sample Computation: Registration Fee = ((P2,000,000.00 – P1,700,000)/P20,000)xP90 + P8,796 =P10,146]
Meanwhile, if the selling price is not exceeding one million seven hundred thousand pesos (P1.7 million), then the registration fee would amount to five thousand five hundred forty-six pesos (P5,546), according to the Registration Fee table of LRA. Keep in mind also that there are incidental fees charged for services, such as issuance of title, the release of encumbrance, and other similar services. Paying of the registration fee is needed as it serves to legally register the transfer of ownership of the real property.
- Move-in fees.
Last on the list of hidden costs of buying a house is the move-in fees. The buyer shoulders this cost upon moving into the property once it’s available. The new owner is required to pay for any association or membership monthly dues depending on the type of property. Move-in fees are required to ensure the smooth operation of services provided by the subdivision or condominium developer and for the convenience of its residents.
There you have it, the hidden costs of buying a house in the Philippines. So the next time you’re going to buy a house, you won’t be surprised anymore by these hidden costs.