Assuming that you already have a property which you intend to sell or lease out, it is important to know whether or not VAT applies to your real estate transactions, and how you can avoid the imposition of VAT. Same goes if you intend to buy a foreclosed property.
As a general rule, 12% VAT shall be imposed on the sale of goods and services. The VAT based for goods sold shall be the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor, while the VAT base for services sold shall be the gross receipts derived from the sale or exchange of services, including the use or lease of properties.
Exceptions
The exceptions to the general rule are enumerated in Section 109 of the Tax Code, as amended. The portions pertinent to real estate transactions are (P), (Q), and (V) of Section 109 quoted hereunder for your reference:
“(P)Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, residential lot valued at One million five hundred thousand pesos (P1,500,000) and below, house and lot, and other residential dwellings valued at Two million five hundred thousand pesos (P2,500,000) and below: Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amounts herein stated shall be adjusted to their present values using the Consumer Price Index, as published by the National Statistics Office (NSO);
(Q)Lease of a residential unit with a monthly rental not exceeding Ten thousand pesos (P10,000): Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO);
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(V)Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of One million five hundred thousand pesos (P1,500,000): Provided, That not later than January 31, 2009 and every three (3) years thereafter. the amount herein stated shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO);
xxx” (underscoring ours)
The above provisions are explained further by Section 4.109-1(B)(p)(4) of Revenue Regulations (RR) No. 16-2005 which provides:
“Sec. 4.109-1 — VAT-Exempt Transactions. —
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(B)Exempt transactions. —
(1)Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from VAT:
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(p)The following sales of real properties are exempt from VAT, namely:
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Sale of residential lot valued at One Million Five Hundred Thousand Pesos (P1,500,000.00) and below, or house & lot and other residential dwellings valued at Two Million Five Hundred Thousand Pesos (P2,500,000.00) and below where the instrument of sale/transfer/disposition was executed on or after July 1, 2005; Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amounts stated herein shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO); Provided, further, that such adjustment shall be published through revenue regulations to be issued not later than March 31 of each year;
If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose of utilizing the lots as one residential lot, the sale shall be exempt from VAT only if the aggregate value of the lots do not exceed P1,500,000.00. Adjacent residential lots, although covered by separate titles and/or separate tax declarations, when sold or disposed to one and the same buyer, whether covered by one or separate Deed of Conveyance, shall be presumed as a sale of one residential lot.“
(q)Lease of residential units with a monthly rental per unit not exceeding Ten Thousand Pesos (P10,000.00), regardless of the amount of aggregate rentals received by the lessor during the year; Provided, that not later than January 31, 2009 and every three (3) years thereafter, the amount of P10,000.00 shall be adjusted to its present value using the Consumer Price Index, as published by the NSO;
The foregoing notwithstanding, lease of residential units where the monthly rental per unit exceeds Ten Thousand Pesos (P10,000.00) but the aggregate of such rentals of the lessor during the year do not exceed One Million Five Hundred Pesos (P1,500,000.00) shall likewise be exempt from VAT, however, the same shall be subjected to three percent (3%) percentage tax.
In cases where a lessor has several residential units for lease, some are leased out for a monthly rental per unit of not exceeding P10,000.00 while others are leased out for more than P10,000.00 per unit, his tax liability will be as follows:
1.The gross receipts from rentals not exceeding P10,000.00 per month per unit shall be exempt from VAT regardless of the aggregate annual gross receipts.
2.The gross receipts from rentals exceeding P10,000.00 per month per unit shall be subject to VAT if the aggregate annual gross receipts from said units only (not including the gross receipt
s from units leased for not more than P10,000.00) exceeds P1,500,000.00. Otherwise, the gross receipts will be subject to the 3% tax imposed under Section 116 of the Tax Code.The term ‘residential units’ shall refer to apartments and houses & lots used for residential purposes, and buildings or parts or units thereof used solely as dwelling places (e.g., dormitories, rooms and bed spaces) except motels, motel rooms, hotels and hotel rooms.
The term ‘unit’ shall mean an apartment unit in the case of apartments, house in the case of residential houses; per person in the case of dormitories, boarding houses and bed spaces; and per room in case of rooms for rent.”
I quoted the law itself and its implementing regulations because they are self-explanatory. I know I should start with the general rule but how to avoid the tax is more fun right?
Example No. 1:
Q:Person A is registered as a non-VAT taxpayer and she is leasing our a four-door apartment building earning annual receipts of less than P400,000.00. Each unit is leased out at P8,000.000 monthly. Will her gross receipts be subject to VAT or to percentage tax?
A:Her gross receipts will not be subject to both VAT and percentage tax. This was the case in BIR Ruling No. DA-150-07 dated March 9, 2007. The 3% percentage tax will only apply to persons whose sales or receipts are VAT-exempt under Section 109 (V) of the same Tax Code and are registered with the BIR as non-VAT entities. In this regard, considering that Person A leases her apartment units at P8,000.00 per unit monthly, she qualifies for VAT exemption under Section 109 (Q) of the Tax Code and not Section 109 (V). Section 109 (Q) expressly provides that leases of residential units with a monthly rental not exceeding Ten thousand pesos (P10,000.00) are not subject to VAT. Thus, Person A is not subject to either VAT or percentage tax.
If we follow the above logic, if a person always sells houses and lots at P2.5M and below and lots only at P1.5M and below, he will not be subject to both VAT and percentage tax. Not bad eh? REBAP President Julius Topacio, during a talk he delivered on the 2nd anniversary of REBAP-Marikina, said that sales of real estate below P3M and sales to OFWs will not be affected by the global recession. This is why I am concentrating on the low cost foreclosed properties.
Example No. 2:
Q:Person B is thinking of selling a house and lot which he bought at P2,000,000.00. What is the best selling price to avoid VAT?
A:P2,500,000.00 is the ceiling for sales not subject to VAT. If the selling price becomes P2,500,001, there shall be 12% VAT amounting to P300,000.12. See what a difference one peso makes?
As for the sale by a bank of its foreclosed properties, the BIR in BIR Ruling No. DA-216-07 dated April 4, 2007 noted that banks are exempt from VAT. In contrast, either CGT or CWT is always applicable to real estate transactions.
We will discuss the imposition of VAT on the sale of real property and lease in a separate post (no exceptions then!). This should give you enough nosebleed for one day.
To our financial freedom!
Jay Castillo
Real Estate Investor
REBL#: 20056
Blog: www.foreclosurephilippines.com
P.S. – This post was written mostly by my wife. Don’t be discouraged or intimidated by taxes as one really has to deal with them sooner or later and it would be better to be familiar with them beforehand.
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I am selling my house in Moonwalk Paranaque for 2,900.000.00 pesos. I have to pay as a seller the capital gain tax, do I have to pay also the Value-added-tax (VAT)? 12%.
This is a house and lot and also appraise value of PHP2,900,000.00
Hi Jay,
Do you have an email address where I can send my email to? There is a clause in the CBTS for my recently purchased property that I am not clear about and I don’t want to make the mistake of signing without being assured that all the articles are fair to both the seller and myself.
Thanks!
Of course po. My apologies. 🙂 Hope she rests well and find comfort in the fact that you have now a special angel in heaven. God bless you & your family.
Good day po. If I am VAT registered po and I’m selling a property for P3.1M and this is our first sale, would the property be subject to VAT?
Hi Jhay,
Can you pls answer Rom’s comment above as it is my same question. Thanks for your help.
Hi Carla,
My wife is the expert on taxes, not me. 🙁
I’ll forward your questions along with the others above that have been left unanswered. 🙂
In due time, Cherry will answer these when she is ready. As it is, we need time to mourn, and to heal, emotionally (and physically in my wife’s case).
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So is it safe to assume that if the real property is a capital asset that it is not subject to VAT whether or not it is owned by an individual or corporation? In other words, if you are subject to Capital Gains – then you are automatically not subject to VAT?
I would like to ask does the lessee have to pay 5% expanded witholding tax even if he is just renting a residential house ( no business) in a subdivision or is he exempted from paying that tax? And with regard to the the Lessor is he only liable to pay to pay the 3% percentage tax since his gross income does not exceed P 1.5 m for the year? What other taxes does the lessor have to pay for residential leasing. Thanks.
Hi… I want to clarify if the discount given to buyer shall not be considered as deduction to the basis (selling price or zonal valuation whichever is higher) of Expanded Withholding Tax? Thanks in advance and more power!
Jay,
I noticed that in your examples, you are treating each sale separately for VAT purposes. I would agree with the discussions assuming the seller is the owner of the property, and selling it as an isolated transaction and not as a business. Now, what if you are in the business precisely of buying and selling lot, house & lot, etc. on a regular basis, and that your gross receipts within the calendar year or within any 12 month period you have already breached the gross receipts threshold that now requires you to be a VAT registered person, at that point all your sales would then be subject to the 12% VAT already.
Hi Jay!
Very curious about your Vat exemption research.
May I know what your source is?
And do developers need a special permit or
certificate from the HLURB/HUDCC to be non-vat?
or are they automatically non-vat because of the
price below 2.5 million?
Thanks,
Nique
Is Rental of commercial space can be register under BMBE law that has below 3M Income?
Hi Jay, thanks for this very informative post. I just have a question for OFWs buying real property – are we exempted on VAT? thanks
Thanks so much to your wife for putting all these info together. I just would like to inquire if I my buyer agrees to buy my bank loaned lot property at P1.5M cash and shoulder the transfer/payments of the remaining 3 yrs amortization from the bank, is 12% VAT or 3% tax still applicable? Appreciate if you can enlighten me on this matter. Thanks!
Hi!
I have a problem. I purchased this vacant lot inside a subdivision in new manila from a sec-registered corporation. Currently, the seller and I are having a hard time ironing out certain things. I was informed that I had to assume the VAT and the capital gains taxes. I agreed to this.
However, upon close examination by my lawyer, he found out that the property is not subjected to VAT given that it is a capital asset. I then informed the buyer of this information.
He said that VAT will be paid because the property cannot be justified as a capital asset given that it is a vacant lot and the office is not even located there.
Can anyone please enlighten me with this? Thank you very much.
Hi Jay
Under the b) exempt transactions particularly on multiple residential lot purchase. Will purchasing two or three CONDOMINIUM UNITS, wherein each unit cost below P2.5M be subject to VAT if the buyer intends to use the three units as one unit? Thank you for your reply.
fea
Hi sir Jay,
Ask ko lang po kung magkano ang computaion sa Bir pag nag transfer ng title sa 120 sqm na lot at 1,250,000 million po price house and na po sya. Gusto ko po malaman kung mag kano aabut ang withholding tax at documentary stamp tax. Gusto ko lang po sana mag karoon ng idea kung mag kanu aabut para ma pag hadaan pag nag transfer na ako ng title.
thanks.
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Hi Jay
I want to ask a quick question regarding VAT on lots over 1.5 Million. I’m planning to buy a lot worth 2 Million from a known property developer and the agent mentioned to me that since the lot costs over 1.5 million, I will have to pay 12% VAT. Is this correct? Is it really the buyer like me that pays the 12% VAT?
Would be thankful for your advice.
Best regards,
Jun Sarmiento
Hi Jun, actually it would be up to the seller if they will decide to pass the VAT to you, the buyer. My suggestion is for you to negotiate with them. Tell them other developers don’t pass VAT to the buyer. I hope this helps. Thanks for visiting!
Dear Jay,
Thank you so much for giving your time and effort to novices like us. I am interested in a foreclosed property for personal use,it is under Metrobank and I am an OFW, my question is : is there a way an OFW can be exempted from paying the VAT? The property is over 2.5M
Thank you
Hi LMC,
You’re welcome and sorry I may have overlooked your question above, hence the very late reply.
As per BIR Ruling No. DA-216-07 dated April 4, 2007, the sale of foreclosed properties by banks are exempt from VAT. Do take note however that either CGT or CWT still applies. Just let me know if you need further clarifications.
Thank you Jay!!
I will wait for your reply.
Hi Gracie, thanks for your patience. I have here answers to your questions which are with the help of my wife.
My understanding is that it will be rent-to-own, so you will be getting rental income first and income from the sale of the property at the end. So in the meantime you should be concerned with the VAT on rental income. As you noted, if the monthly rent is above 10k but less than 1.5M, it’s still not subject to VAT (assuming you did not opt to be VAT-registered yet).
You are correct, rental monthly payments over P10,000.00 but whose aggregate yearly total doesn’t exceed 1.5M is not subject to VAT but to 3% on gross receipts.
The other taxes you will have to consider shall be DST on the lease contract, Transfer Tax which you will pay later when you transfer the property at the end.
During the rent to own option period up to the time the unit is paid out, the company has to pay the 3% gross receipts tax, If you are not VAT-registered and your gross receipts do not exceed P1.5M.
Yes, when the unit is fully paid out of the rental payments, no CGT will be imposed but note that you will have to pay regular income tax on your gain from the sale. Selling price less cost of sales and selling etc. expenses will be subject to income tax. If the selling price is P1,000.00 then you will have a loss.
The Deed of Absolute Sale is a different contract. You will state a contract price there (for example, if in the Contract to Sell you stated that you will sell the property for P1,000.00 upon completion of all rent-to-own payments, the P1,000.00 will be the contract price. Now assuming that you made a corporation for this whose primary purpose is to engage in the real estate business, the gain (if any) will be subject to regular income tax. When you will get the Tax Clearance/Certificate Authorizing Registration, I assume that the BIR will ask why the selling price is so low, so you may say that the scheme was rent-to-own and that you had earned from the rental income already. I assume that the next question will be if the proper taxes (including income tax) have been paid on the rental income, so it is possible that they will look for this.)
If the rental for the parking is below P10k per month then it may not be subject to both VAT and 3% percentage tax.
If you use an agent to market the rent-to-own, in my opinion, the best option is to just pay upfront commission based on TCP, to be paid once 20% DP has been paid. You will also have to withhold 10% withholding tax on the commission.
Note that this is just our opinion and we have not yet done the exact same circumstances as yours. Please do not rely solely on this opinion, please confirm it with the BIR.
In addition, please also read up on the BMBE Law (Barangay Micro-Business Enterprise Law). You may be exempt from income taxes if you register as a BMBE.
Please refer to this link for the Q&A, the law itself, and the implementing rules:
http://www.dti.gov.ph/dti/uploads/file/Barangay%20Micro%20Business%20Enterprise.pdf
http://www.dti.gov.ph/uploads/DownloadableForms/06%20-%20BMBE%20Development%20Fund%20Guidelines.pdf
Let me know the results if you go to your city hall. Good luck and let me know if you need any further clarifications!
Hi Jay,
I bought a 1 BRM condo (Paloverde Tower) with parking. I intend to sell it on a rent to own scheme. I have developed a rent calculator (excel) to let the renters devise their own scheme. I’ve read most of your entries on rent to own scheme and I would like to thank you for giving me enough courage to go on this venture. I also read Larry Gamboa’s Think rich Pinoy.
My questions would be in tax – First, if I’m going to create a corporation specifically for this venture, I would not be subjected to CGT as this is now an ordinary business transactions? However, I would be covered by VAT if the company is going to be registered as VAT and the selling price of the condo is over P2.5M?
Since my scheme is rent to own, please confirm if my understanding are correct;
1. Rental monthly payments over P10,000.00 but whose aggregate yearly total doesn’t exceed 1.5M is not subject to VAT but to 3% on gross receipts.
1.1. What other taxes do I have to think about?
2. During the rent to own option period up to the time the unit is paid out, the company has to pay the 3% gross receipts tax.
3. When the unit is fully paid out of the rental payments, no CGT will be imposed. Deed of Sale is now executed between the company and the renter.
4. The condo unit and the parking will have their own contract to sell independent of each other? And both rentals will be subjected to 3% gross receipts.
If I use an agent to market the rent-to-own, what is the best commission scheme? Do I have to pay her the commission equal to 1 month rent per year until the condo and parking are fully paid?
Thank you so much in advance for your help.
Hi Gracie, I just want to let you know that I have read your questions and will answer it asap, have to cross check our answers with BIR rulings to ensure you get the best and most accurate answers…
this is a good read. thanks for posting. very informative.