Taxes in Real Estate: Here’s what you should know

Real estate tax

          As you purchase a real estate property is most likely to be a rewarding experience for most people. To those who want to establish their life as comfortable as possible, signing a deed of sale is seen as the pinnacle of success. However, people should be aware that purchasing a house also has its own sets of responsibilities and duties. Well for starters, home ownership is a civic duty to assess, pay and declare their real estate taxes in the philippines.

          If you are a home buyer, you should know about the taxes that go along with owning a property. According to the Republic Act No.7160 or RA 7160, the government shall administer, levy, appraise, and collect real property tax.

          Homeownership is quite tricky, sure you get to give a place for your own that you can remodel, redecorate, and renovate it however you envision it to be. Although you also have to build equity as you pay down your mortgage. Things like mortgage interest and property taxes are expenses you can deduct, this can lower your tax bill for the year. Here are some of the pros real estate investments can provide you:

  • A steady source of income
  • Loan paydown
  • Equity-building
  • Cash flow
  • Portfolio diversification
  • A hedge against inflation
  • Tax benefits

Property tax vs. Real Estate tax

          Property tax is pretty simple, if you’re an owner of a house then you’re probably familiar with property taxes. The local government collects real estate taxes to help pay for projects and services that would benefit the community all together like for emergency services, libraries, roads, schools, etc. You directly pay taxes to your local tax assessor annually as part of our monthly mortgage payment. The said property taxes are based on the assessed value of your property that is on the land as well as any buildings on it. Just remember that as long as you own the property, you continually pay real estate taxes. It doesn’t stop when you pay off your mortgage, nor do you stop if you no longer are using the property as your primary residence. Property taxes can periodically change and your bill could be lower or higher than the previous years, and this can happen when your home is reassessed or whenever your local government updated the tax  rate.

          While real estate taxes cover only taxes on real properties like condos, houses and lots, or rental properties, property taxes include the tangible and movable personal property including transportation vehicles like planes, boats, trailers, cars, and other mobile homes. The types of personal property subject to personal property tax vary by jurisdiction in some cases, there might be some cases where a mobile home is considered as a real property and not a personal property.

Taxes and deduction for real estate investors

Similar to homeowners, real estate investors pay property-related taxes and they enjoy certain tax breaks. Overall, real estate investors pay three types of taxes, namely:

1. Property taxes

This is when investment property is assessed at its “highest and best use”. Generally, that is the most profitable use of the said property, although it also should be legally permissible, financially feasible, and physically possible.

2. Real estate income taxes

It is taxed as an ordinary income. The real estate income is everything that you earn from rents on the property minus any deductible expenses.

3. Capital gains taxes

If you ever sell an investment property for more than what you’ve paid for you’ll owe capital gains tax. Real estate investors don’t generally qualify for exclusion since their properties aren’t their primary residence.

Finding a good tax professional

          It might be relatively simple for homeowners to handle tax, however, taxes for real estate investors can be quite tricky. These taxes are the ones you’ll most likely encounter as a real estate investor. Although you may owe other taxes and could be eligible for tax benefits, of course it depends on your specific situation. Tax laws are very complicated and they change periodically, except if you’re a real estate tax law rock star, then you should plan on getting someone who is an expert in this field. Find yourself a well trusted tax accountant or a CPA to help you through the process of purchasing, selling, operating your investment property. In that sense, you’ll be able to get the best treatment possible and there won’t be any nasty surprises coming your way.

Depreciation rapture on rental properties

When you happen to sell a rental property, depreciation will be a huge part of how much tax you owe. Since depreciation deductions lowers your cost basis in the property, and so, they determine the gains and losses when you finally get to sell the property. The IRS recalls the depreciation deductions you’ve made and they will want some of that cash back. This is what depreciation recapture does, it is based on ordinary income tax rate and capped at 25%. This applies to the gain that can be attributed to depreciation deductions you’ve taken before. However, if you’ve sold an investment property for a loss, the depreciation recapture won’t apply to this. So long as you owe the property for at least a year, then the loss is considered to be a loss, so you can use it to lessen your tax liability during the tax year.

How are REITS taxed?

          Here’s another way that you can invest in real estate taxes, it is through real estate investment trust (REITS). They are specialized companies that allow people to pool their funds in order to invest in a collection of properties and other real estate assets. If you’re one of the people who owns a REIT, you will receive a 1099-DIV annually that illustrates the type and value of dividends you’ve received. There are namely three types of dividends:

  • Ordinary income dividends- Usually taxed at the ordinary income tax rate.
  • Capital gains distributions-Usually taxed as long-term gains, no matter how long you’ve had the cash in the REIT.

REITS enables the public to own shares of real estate properties like house and lot, rent to own homes, and housing developments without worrying about shelling out a lot of money and overlooking the day-to-day operations of these entities. Through the REITs, investors like OFWs and middle class Filipinos would be able to enter the real estate market with a small capital. This is made possible with the very affordable houses offered by Bria Homes. No need to have millions of cash when Bria Homes can provide you a quality home starting with the price of 1,897 php per month. The fun doesn’t end there, they also offer amazing amenities from covered basketball courts, swimming pools, parks, gyms, to playgrounds. Bria Homes also gives an exceptional design to their properties since it is made with long lasting materials that can resist harsh weathers and they also have a modern touch to them so that both exterior and interior would be looking chique for the home owners and passer-by.

The price starts Php1,897 and this is very well spent since its location is the best possible place to where you can grow a family, plus the community that Bria Homes has provided is clean and friendly, perfect for your future kids to grow up in.

Consequences of Failing To Pay Real Property Tax

As a homeowner, you are the only one responsible for your financial obligations that come with buying a property. If you happen to fail to pay your real property tax, there will be corresponding penalties to pay as well. These late payments are subjected to a 2% interest per unpaid amount. It can reach up to a maximum of 72% if unpaid for three years.

Rates Of Real Property Tax In The Philippines

As written in theSection 233 of the RA 7160, the rates of real property taxes will heavily depend on the respective location of the property and assessed value of the property in the country. Its rate of real property tax within the Metropolitan Manila Area is 2% assessed value of real property. In contrast, the rate for provincial areas is 1%of the assessed value of its real property. Although some provincial areas like Cavite have updated their payment to basic tax to 2% and 1% tax for Special Education Fund (SEF)  since 2008.

          For example, a residential property in Tagaytay City, owned by Jorge Salva is said to have a market price of Php30,000,000.00. The property measures a parcel value at Php18,000,000, while the structure of the house itself, also known to be the building, is valued at a price of Php12,000,000. In learning to compute the real property tax, it starts with being able to determine the total assessed value of the property itself. This is done by adding the assessed value of the land and assessed value of the building.

Assessed Value of Land: Residential Land (Php18,000,000) x Assessed level (20%) = Php3,600,000

Assessed Value of the Building: House (Php12,000,000) x Assessment Level (40%) = Php4,800,000

Total Assessed Value of the Property: Php3,600,000 + Php4,800,000 = Php8,400,000

We now have the total assessed value of the property, then we have to multiply it by the applicable real property tax rate to get the tax amount to be paid by Jorge Salva.

Real Property Tax: Php8,400,000 x Cavite RPT rate (2%) = Php168,000

This is now the total basic real property tax to be paid by Jorge Salva. However, the tax for the Special Education Fund must also be computed in this.

Special Education Fund (SEF) LEVY: Php8,400,000 x SEF levy = Php84,000

In summary this is the total of what Jorge Salva would have to pay. Real property tax computations are a bit complex but you start to get the hang of it once you’ve made several computations in the long run and calculate them with ease.