The donation of properties can be used as a tool for estate planning. One just needs to be aware that donations are subject to donor’s tax. Read this to find out how much donor’s tax you need to pay when donating a property as part of estate planning.
Real property, just like any other material possession, may not be brought to the afterlife. You need to transfer property sooner or later. Usually, however, the transfer of property prior to death is a taboo subject so many end up dealing with property transfer problems only after a person has died. It is always good to be prepared since we will all surely die – there is simply no escaping it, so might as well prepare for the inevitable.
Why donate your properties prior to death?
Donation may be considered as an estate planning tool because you are able to transfer your properties prior to death little by little every year and therefore you can take advantage of the graduated donor’s tax rates. If you have a lot of properties at the time of death, the estate tax* would be higher because the total amount of the properties will probably fall under a higher tax range
*If you want to learn more about estate tax (the tax that needs to be paid after death) read this: Death, Real Estate, and Estate Tax
On another note, it is usually the case that the family spends a lot for medical care prior to death, and because of this, the family’s cash reserves are depleted. If the family is not liquid and they need to pay the estate tax within six months from the time of death, many times the family is forced to sell their properties below market value because they are under time pressure. It is during these pressure points that many investors are able to buy good properties at a good price. I don’t want to view it as taking advantage of the misfortune of others – rather, I want to think of it as the investors helping the family solve their cash problem. If no one bought the property, the family would be in a worse situation.
Another problem that may arise upon death is that the children or heirs will be fighting each other for their “rightful” share of the deceased’s property. I don’t think any parent would want their loved ones to be fighting over money or property. If the properties are already distributed as agreed upon by all parties prior to death, then this problem may be alleviated.
Lastly, I believe that a person who already thought in advance of the transfer of properties prior to death, and actually had no more significant properties to transfer upon death, would be at peace upon death because he/she did not leave problems to his/her family. Dealing with grief is hard enough, it would be difficult to deal with the nitty-gritty taxes and what-not during a most stressful time.
Of course, there are downsides to donation too – Who shall control the properties? Who gets the fruits/rental income? etc… etc… These may be answered by trusts and other legal documents. But for now, let’s deal with straightforward donation.
What is Donor’s Tax?
Donor’s tax is imposed on tax on the transfer by any person, resident or non-resident, of a property by gift. For an overview on donor’s tax, please check the BIR website. The legal basis for donor’s tax may be found in Sec. 98 to Sec. 104 of the National Internal Revenue Code (NIRC) (aka the Tax Code). Check also the Donor’s and Estate Tax Regulations (BIR Revenue Regulations No. 2-2003) and Revenue Memorandum Order (RMO) No. 1-98.
What is the tax base?
The donor’s tax base shall be the total value of the net gifts during the taxable year. The value of the net gifts shall be based on the fair market value (FMV) of the gifts at the time of donation. In case of real property, the tax base shall be the BIR Zonal Value or FMV per Tax Declaration, whichever is higher. If there is no Zonal Value, the tax base shall be the FMV based on the latest tax declaration. If there is an improvement (like a house or a building), the FMV of the improvement shall be the construction cost based on the building permit and/or occupancy permit plus 10% per year after the year of construction, or the FMV based on the latest tax declaration.
The term “net gift”, for purposes of donor’s tax, pertains to the net economic benefit which the done gets from the transfer. Thus, if a property encumbered with a mortgage is transferred as a gift, but the donee is required to pay the mortgage, then the net gift is computed by deducting the amount of mortgage assumed by the donee from the fair market value of the property given as a gift.
If you donate on different dates within a year, a donor’s tax return shall be filed for each date of donation, and the donor’s tax base shall be based on the accumulated donations for the current calendar year (January 1 to December 31). Thus, the more gifts you make within a calendar year, the higher the probability that the donor’s tax will fall on a higher tax bracket. Note though, that donor’s tax previously paid on previous donations shall be deducted from the donor’s tax payable. The good news here is that you will get a fresh start for each year, and effectively, you can donate P100,000 in cash or in kind at zero donor’s tax.
You may even donate cash which the donee can use to purchase property, so the property can be in the name of the donee. For example, a parent can donate cash for installment payments of property so that the property may be declared in their child’s name, since the child cannot purchase directly without a source of income.
Please note that in case of donation to relatives (not strangers), only one return shall be filed for several gifts/donations by the donor (the one giving the donation) to the different donees (those receiving the donation) on the same date. If the gift/donation involves conjugal or community property, each spouse shall file a separate return for their respective shares in the said property.
If you purchased a property below its fair market value (FMV), the difference between the FMV and the selling price shall be deemed a gift of the seller, subject to donor’s tax. This is also called a transfer for less than adequate consideration.
Exemptions from Donor’s Tax
- Dowries or gifts made on account of marriage and before its celebration or within one year thereafter by parents to each of their legitimate, recognized natural, or adopted children to the extent of the first Ten thousand pesos (P10,000);
- Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government; and
- Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited non-government organization, trust or philanthropic organization or research institution or organization, provided, however, That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes.
Based on the BIR website, the following are likewise exempt from donor’s tax:
- Encumbrances on the property donated if assumed by the donee in the deed of donation
- Donations made to the following entities as exempted under special laws:
- Aquaculture Department of the Southeast Asian Fisheries Development Center of the Philippines
- Development Academy of the Philippines
- Integrated Bar of the Philippines
- International Rice Research Institute
- National Social Action Council
- Ramon Magsaysay Foundation
- Philippine Inventor’s Commission
- Philippine American Cultural Foundation
- Task Force on Human Settlement on the donation of equipment, materials and services
What are the Donor’s Tax rates?
The donor’s tax rate will be based on the law prevailing at the time of donation.
For donations made on January 1, 1998 up to the present, if the donee is a stranger, the donor’s tax rate is thirty percent (30%).
A stranger is a person who is not a brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant, or a relative by consanguinity in the collateral line within the fourth degree of relationship. This just means you are related by blood, and you count the degree by going up first to the person who “connects” you then go down.
For example, your first cousin is within the fourth degree. You go “up” to your dad (1 degree), then “up” to your lolo (1 degree), then go “down” to your uncle who is your dad’s brother (1 degree), then “down” to your first cousin (1 degree), so 4 degrees in all.
Note that a child who is legally adopted is not considered a stranger. Donations between corporations or from an individual to a corporation shall be considered as donations to a stranger.
If the donee is not a stranger, the donor’s tax rate, based on the net gifts, are as follows:
But not over
The tax shall be
Of the excess over
Who should pay
The donor or the transferor for less than adequate consideration
When to pay
Within thirty (30) days after the date the gift is made. If more than one gift or donation is made within one year, a separate return should be filed for each gift/donation within thirty (30) days after the date the gift is made.
BIR Form to be used
Where to file and pay/ Filing procedure
Prepare three copies of the donor’s tax return (two copies shall be for the BIR and one copy shall be for the taxpayer) and file them with any Authorized Agent Bank (AAB) of the Revenue District Office (RDO) having jurisdiction over the place of the domicile of the donor (that is, where the donor lives) at the time of the transfer.
In places where there are no AAB, the return will be filed directly with the Revenue Collection Officer or duly Authorized City or Municipal Treasurer where the donor was domiciled at the time of the transfer. If the donor has no legal residence in the Philippines, file the return with Revenue District No. 39 – South Quezon City (this is along Quezon Avenue, with a DBP branch at the ground floor).
In the case of gifts made by a non-resident alien (that is, not a Filipino citizen), the return may be filed with Revenue District No. 39 – South Quezon City, or with the Philippine Embassy or Consulate in the country where donor is domiciled at the time of the transfer.
Penalties for late payment
Same as other taxes, 25% surcharge plus 20% interest per year (under Secs. 248 and 249 of the Tax Code, respectively). If there is fraud, the surcharge shall be 50%. You may also pay compromise penalties in lieu of imprisonment (click on the link for the schedule of compromise penalties).
Based on the BIR website, the following requirements must be submitted before the Tax Clearance Certificate/Certificate Authorizing Registration (that is, the document required for the title to be transferred) can be released:
|1.||Deed of Donation|
|2.||Sworn Statement of the relationship of the donor to the donee|
|3.||Proof of tax credit, if applicable|
|4.||Certified true copy(ies) of the Original/Transfer/Condominium Certificate of Title (front and back ) of lot and/or improvement donated, if applicable|
|5.||Certified true copy(ies) of the latest Tax Declaration (front and back pages) of lot and/or improvement, if applicable|
|6.||“Certificate of No Improvement” issued by the Assessor’s office where the properties have no declared improvement, if applicable|
|7.||Proof of valuation of shares of stocks at the time of donation, if applicable|
|•||For listed stocks – newspaper clippings or certification issued by the Stock Exchange as to the par value per share|
|•||For unlisted stocks – latest audited Financial Statements of the issuing corporation with computation of the book value per share|
|8.||Proof of valuation of other types of personal properties, if applicable|
|9.||Proof of claimed deductions, if applicable|
|10.||Copy of Tax Debit Memo used as payment, if applicable|
Additional requirements may be requested for presentation during audit of the tax case depending upon existing audit procedures.
Please read BIR Revenue Regulations No. 2-2003 for a sample computation.
Documentation of the donation
Consult a lawyer with regard to the format of the Deed of Donation, and make sure that the donation is properly accepted and notarized during the lifetime of the donor.
To our success and financial freedom!
Cherry Vi M. Saldua-Castillo
Real Estate Broker, Lawyer, and CPA
PRC Real Estate Broker License No. 3187
PRC CPA License No. 0102054
Roll of Attorneys No. 55239
Text by Jay Castillo and Cherry Castillo. Copyright © 2013 and onwards All rights reserved.
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