What you need to know about Value-Added Tax (VAT) on the sale of Real Estate

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A lot of people have questions on taxes, including Value-Added Tax or VAT[1] on the sale of Real Estate[2], so I will try my best to explain it as simply as I can.

The subject of taxes is quite technical so I apologize if my explanation may seem quite hard to digest at times.

Why should we learn about taxes?

Why is it important to know whether the sale of a certain property is subject to VAT and Creditable Withholding Tax (CWT), or Capital Gains Tax (CGT)? To put it simply, if you pay the wrong tax, for example, CGT instead of VAT and CWT, you may be liable for deficiency VAT and CWT plus penalties, and you would have to undergo a long and difficult process to get a refund (Good luck in getting a refund!).

If you don't understand VAT on real estate, don't give up.. read and learn

Aside from the very painful payment of a lot of taxes, there may be a delay in the r

elease of the Certificate Authorizing Registration (CAR) which you need in order for the title to the property to be transferred to the name of the buyer.

In addition to the above, VAT should be considered in the pricing of real estate sold. Note that compared to a capital asset subject to 6% CGT, an ordinary asset will be subject to CWT of as high as 6% plus 12% VAT. Thus, VAT may make or break a transaction, or lower the profit of the seller.

When is a sale of real property subject to VAT?

If the seller-taxpayer is a VAT-registered person, the sale of his ordinary asset shall be subject to VAT.

A person should register as a VAT entity if his gross annual sales and/or receipts exceed P1,919,500.00 in a year. If he is not originally registered as a VAT entity but he exceeded the threshold, he should submit BIR Form No. 1905 (Taxpayer Registration Update) to change to VAT.

When is an asset considered as ordinary? Ordinary assets are those which are:

  1. Stock in trade of a taxpayer or other real property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year; or
  2. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or
  3. Real property used in trade or business (i.e., buildings and/or improvements) of a character which is subject to the allowance for depreciation provided for under Sec. 34(F) of the Code; or
  4. Real property used in trade or business of the taxpayer.

In simple terms, real property considered as ordinary assets are those which are used in the trade or business of the taxpayer. Please read Revenue Regulations (RR) No. 7-2003[3] in full to determine when an asset shall be considered as capital or ordinary – this is also dependent on the classification of the taxpayer.

I also wrote about the Creditable Withholding Tax (CWT) here: http://www.foreclosurephilippines.com/2009/03/creditable-withholding-tax-in-real.html and the Capital Gains Tax (CGT) here: http://www.foreclosurephilippines.com/2009/02/real-estate-taxation-what-is-capital.html, you may read the said posts should you wish to learn more about them.

VAT Taxpayer

The VAT taxpayer in this case is a person who is engaged in the real estate business and is the seller of a real property classified as an ordinary asset. Taxpayers engaged in the real estate business shall refer collectively to real estate dealers, real estate developers, and/or real estate lessors. A taxpayer whose primary purpose of engaging in business, or whose Articles of Incorporation states that its primary purpose is to engage in the real estate business shall also be deemed to be engaged in the real estate business.

How about those not in the above list? Registration with the HLURB or HUDCC as a real estate dealer or developer shall be sufficient for a taxpayer to be considered as habitually engaged in the sale of real estate. If the taxpayer is not registered with the HLURB or HUDCC as a real estate dealer or developer, he/it may nevertheless be deemed to be engaged in the real estate business through the establishment of substantial relevant evidence (such as consummation during the preceding year of at least six (6) taxable real estate sale transactions, regardless of amount; registration as habitually engaged in real estate business with the Local Government Unit or the Bureau of Internal Revenue (BIR), etc.).

Many ask how are the six taxable real estate sale transactions counted. According to our real estate mentor, when you buy a property and later sell it, those are counted as two transactions. I believe this is the conservative position. It will actually depend on the BIR officer processing your papers. Technically, and as written, it says six “sale” transactions.

A person who is not engaged in the real estate business but who is selling real property which is classified as its ordinary asset is also subject to VAT. This is pursuant to RR No. 4-07 which provides:

“However, even if the real property is not primarily held for sale to customers or held for lease in the ordinary course of trade or business but the same is used in the trade or business of the seller, the sale thereof shall be subject to VAT being a transaction incidental to the taxpayer’s main business.”

Thus, if a taxpayer is engaged in the restaurant business and sells his restaurant building which he used in his restaurant business, the said sale shall be subject to VAT, notwithstanding that the taxpayer is not engaged in the real estate business.

Please note thank banks are not considered as VAT taxpayers. Thus, their sale of foreclosed properties are not subject to VAT. They are subject instead to Creditable Withholding tax (CWT). Their foreclosed assets, when sold, are considered as ordinary assets but banks are not considered as engaged in the real estate business.

VAT rate

The sale of properties which may be considered as ordinary assets would be subject to the 12%[4] VAT effective February 1, 2006.

Tax base of output VAT

The tax base of the 12% output VAT is the selling price (SP) or the fair market value (FMV) of the property whichever is higher.

If VAT is not billed separately in the document of sale, the selling price stated in the deed is deemed inclusive of VAT. Thus, to get the selling price without VAT, divide the selling price in the deed by 1.12. To get the VAT, multiply the selling price without VAT by .12.

What if the gross selling price in the document of sale is equal to the zonal value or market value of the property? Will the selling price without VAT be effectively lower than the zonal or market value of the property? No, the zonal/market value shall be considered as net of the output VAT.[5]

Please note that the VAT should be separately indicated in the document of sale and official receipt as there are penalties for non-compliance.[6]

VAT payable

The amount of VAT payable is the difference between the output VAT and input VAT. Keep the VAT-registered official receipts (for services purchased) and invoices (for goods purchased) supporting your business expenses so you can claim input VAT which can reduce your output VAT payable.

Time of payment of VAT

The time of payment will depend on whether a sale is an Installment Sale or a Deferred Payment Sale. A sale is on installment if the initial payments in the year of sale do not exceed25% of the gross selling price. A sale is considered as cash or deferred payment if the initial payments in the year of sale exceed 25% of the gross selling price. [7]

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Initial payments means payment or payments which the seller receives before or upon execution of the instrument of sale and payments which he expects or is scheduled to receive in cash or property (other than evidence of indebtedness of the purchaser) during the taxable year when the sale or disposition of the real property was made. It covers any downpayment made and includes all payments actually or constructively received during the calendar year of sale, the aggregate of which determines the limit set by the law.

In other words, add the downpayment plus all amortization payments (principal portion only) during the year and compute if the total exceeds 25% of the gross selling price.

A.    Deferred payment/Cash basis

  • The transaction shall be treated as a cash sale which makes the entire selling price subject to VAT in the month of sale.

B.    Installment basis

  • Each installment payment actually and/or constructively received by the seller is subject to VAT.

The monthly VAT return should be filed on or before the 20th day of the month following the close of the 1st two months of the quarter (February 20, March 20, May 20, June 20, August 20, September 20, November 20, December 20) while the quarterly VAT return should be filed on or before the 25th day of the month following the last month of the quarter (April 25, July 25, October 25, January 25).

Place of payment

The VAT should be paid at the Authorized Agent Bank (AAB) of the Revenue District Office (RDO) where the real property is located.  In places where there are no AAB, the return shall be filed directly with the Revenue Collection Officer or Authorized City or Municipal Treasurer.

BIR Form to use

The monthly VAT return is BIR Form No. 2550M,[8] while the quarterly VAT return is BIR Form No. 2550Q[9]

Exemptions from VAT

The following are exempt from VAT:

  • Sale of residential lot not exceeding P1,919,500.00 (effective January 1, 2012, as per RR No. 16-2011[10]). If two or more adjacent 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 does not exceed P1,919,500.00 (effective January 1, 2012, as per RR No. 16-2011[11]).

In practice, I have heard of cases where adjacent condominium units are bought but the selling prices are not aggregated for purposes of computing whether the sale exceeds the threshold. I believe that the reasoning made is that adjacent condominium units are not the same as adjacent residential lots and thus, the rule on adjacent residential lots does not apply. This is the aggressive position.

  • Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business (in other words, a capital asset);
  • Sale of real property utilized for low-cost ( i.e. P750,000.00) and socialized housing ( i.e. P400,000) as defined by Republic Act No. 7279 or the Urban Development and Housing Act of 1992;
  • Sale of residential house and lot not exceeding P3,199,200.00 (effective January 1, 2012, as per RR No. 16-2011[12]). In practice, condominiums use this amount as the VAT threshold.

I wrote about the increase in the VAT threshold effective January 1, 2012 here: http://www.foreclosurephilippines.com/2011/11/threshold-for-vat-exemptions-to-be-increased-effective-january-1-2012.html. RR 3-2012 clarified that the increased thresholds shall apply to those sales whose supporting instruments were executed or notarized on or after January 2, 2012  ftp://ftp.bir.gov.ph/webadmin1/pdf/62308RR%203-2012.pdf.

I hope somehow this post helps you in understanding VAT on the sale of real estate. I shall discuss VAT on the lease of real estate in a separate post. If you are knowledgeable on the topic and I have discussed something erroneously, I would appreciate it if you could assist me in correcting it.

Please note that VAT on real estate is a very broad topic in itself so this is already an abridged discussion. I strongly recommend that you read the rulings cited as it is highly possible that the answers to your questions may be found there.

Feedback and comments are highly appreciated. Let me know what you think, or what you want to know, by leaving a comment below, and don’t forget to subscribe to get notified when we publish new articles about real estate taxation. Thank you!

Happy investing!

~~~

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 © 2011 All rights reserved.

Full disclosure: Nothing to disclose.

______________________________________________________________

References:

[1] The BIR website has a summary on VAT at http://www.bir.gov.ph/taxinfo/tax_vat.htm

[2] This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. While every effort has been used to ensure the accuracy of the information provided, the author disclaims any liability from the direct or indirect use of this material.

[3] You may download RR No. 7-2003 from ftp://ftp.bir.gov.ph/webadmin1/pdf/1344rr07_03.pdf

[4] Section 106 of the Tax Code, as amended by R.A. No. 9337 dated May 24, 2005

[5] RR No. 4-2007

[6] You may download RR 18-2011 at ftp://ftp.bir.gov.ph/webadmin1/pdf/61128RR%2018-2011.pdf

[7] SEC. 4.105-2, Revenue Regulations (RR) No. 16-2005 ftp://ftp.bir.gov.ph/webadmin1/pdf/26116rr16-2005.pdf, as amended by RR No. 4-2007 ftp://ftp.bir.gov.ph/webadmin1/pdf/33868rr%20no.%204-2007.pdf

[8] http://www.bir.gov.ph/birforms/form_per.htm

[9] http://www.bir.gov.ph/birforms/form_per.htm.

[10]  You may download a copy of RR No. 16-2011 at ftp://ftp.bir.gov.ph/webadmin1/pdf/60762RR%2016-2011.pdf

[11]  You may download a copy of RR No. 16-2011 at ftp://ftp.bir.gov.ph/webadmin1/pdf/60762RR%2016-2011.pdf

[12]  You may download a copy of RR No. 16-2011 at ftp://ftp.bir.gov.ph/webadmin1/pdf/60762RR%2016-2011.pdf

 

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About Cherry Castillo

is a Real Estate Broker (PRC Real Estate Broker License No. 3187), Lawyer (Roll of Attorneys No. 55239), and CPA (PRC CPA License No. 0102054). She is the 2013 Internal Education Head of REBAP-LMP

  • Ban

    I know that this blog post is a year old, but I just want to share my thoughts. You stated that a restaurant business is subject to VAT if the owner sells his restaurant building.

    However, please refer to BIR Ruling No. DA-32-2005, issued onJanuary 27,
    2005. It says that a hotel business selling its hotel building is not subject to VAT. I might be wrong on this one, but may be you can shed light on this.

    Thanks.

  • ginaanna

    i am an employee. i was assigned in cebu therefore i decided to sell my house in antipolo. while waiting for my house to be sold, i rented it out for 2 years (10k per month). after 2 years, my house was sold. legally speaking, does this make me somebody habitually engaged in real estate; therefore the house is already an ORDINARY asset? thanks in advance.

  • http://n/a nitz

    Hi Ms. Cherry/Sir Jay:
    Our company is into leasing of real estate business, we paid one of our outstanding loans with a piece of land, 12000sqm. via dacion en pago:
    1. the land is with zonal value of 35k per sq.m.
    2. is the transaction which is considered sale of ordinary assets subject both to vat and capital gains tax?

    Thanks,
    Nitz

  • Nilda

    Greeitngs!
    Ms. Cherry, question lang po. Is having a poultry, nagpapalaki ng manok, considered agricultural business? Tama po bang ang gamitin na zonal (for CGT computation) ay ang commercial zonal value ng lupa ng pinakamalapit na barangay na may commercial operation? Salamat po uli.

  • Nilda

    Hello, Ms. Cherry, eto po ang question ko. Yung buyer bumili ng agrilot with poultry houses. He shouldered the CGT since mababa na yung bili nya ng property. But since yung poultry was used for business ng seller, sabi ng BIR kelangan pa magbayad ng VAT yung seller. Alin po ba ang base amount, yung Zonal (FMV) ng BIR na 7M o yung deed of sale na P1.6M. The buyer had paid so much for the CGT. kasi kahit agri lot used in business ay ang zonal ng BIR ay commercial. He cannot pay anymore or shoulder the VAT, likewise the seller who has just receieved enough for her needs and other obligations. Can you give your opinion on this? Pls suggest references for further readings, so i can help my friend, the new owner. Thank you very much

  • maricel panlaqui

    Hi Ma’am Cherry/Sir Jay Castillo,

    Your post has helped me a lot as a new real estate broker. i hope you can help me on this. I have a trasaction wherein the seller, a company does not exist any more (SEC registration was already revoked) (no reportorial). it is a condominium unit, commercial space. is it subject to VAT? the Unit is under the name of thesaid company.

  • Flor Santiago

    Hi Ms. Cherry . We are a registered VAT lending company. In the ordinary course of business we foreclose assets and sell them. If we sell a foreclosed residential lot for P900,000 are we subject to pay VAT based on the selling price? Thanks.

  • Michael Go

    hi! Thank you very much for all the info! it is very informative keep it up!

    Just a question, can Creditable Withholding Tax and VAT be applied at the same time? Because I am thinking of developing townhouses and I have to know the taxes applicable. Thank you :)

  • Jon serrano

    Hi your article is very useful. I would like to ask your opinion in my case. I am a licensed real estate broker. I sold a condo from a developer and in order to get my commission they required meto be a vat reg broker so i had my bir tin to be vat. No my question is, if i sell my own house under our spouses names, will it be covered by vat?
    Hope you can clear it.ty

    • http://www.foreclosurephilippines.com Cherry Castillo

      Hi Jon,

      Sorry for my late reply. Since it is your house, it is you capital asset, hence subject to CGT not VAT. You may actually be exempt from CGT since this may qualify as a sale of a principal residence. Pls see BIR Revenue Regulations 14-00 for details.

      Best regards,
      Cherry

  • Ning

    Hi, I bought a townhouse from psbank a few years back. Do i need to pay vat for it po? How can i confirm po kaya if vat needs to be paid? I called psbank cust serv and all they say is taxes will be paid by buyer (which is in the contract) but they dont confirm if vat needs to still be paid.

    Thanks in advance. I really find your site informative. :)

    • http://www.foreclosurephilippines.com Cherry Castillo

      Hi Ning,

      Sorry for my late reply, Banks are subject to Gross Receipts tax (GRT) and not VAT. Unless the bank is not the real seller, in practice banks do not have VAT.

      Best regards,

      Cherry

  • Yvonne Lim

    Hi Ms.Cherry,
    I’d like to ask if the the real property taxes paid quarterly by unit owners of condos are subject to 12% vat? I understand that the sale of real property is subject to VAT but the real property tax is tax already. Is it really correct to add 12% VAT?

  • http://www.foreclosurephilippines.com Cherry Castillo

    UPDATE: The BIR has released Revenue Regulations No. 13-2012 dated October 12, 2012 which states that the sale of adjacent residential houses and lots and other residential dwelling like condominium units to one buyer shall be considered as a single sale for VAT purposes. The two sales, if consummated within a 12-month period, shall be considered as one sale for VAT purposes. Please see:

    ftp://ftp.bir.gov.ph/webadmin1/pdf/65724RR%20No%2013-2012.pdf

    Best regards,
    Cherry

  • Dada Raq

    Sir, Ma’am, if I have 10 residential lots (all registered under my name), and its sold to 10 different persons from Feb 2012 onwards, and the total sales price is P1.7M. I am disposing all of it thru a real estate broker because I am already old and needs money instead of land:
    Q1) Are these 10 transactions totalling to P1.7M subject to VAT?
    Q2) What is the tax due on my Broker, being the broker of the properties?
    Thank you and regards. I am a subscriber of your Blog! – Dada (La Union)

    • http://www.foreclosurephilippines.com Cherry Castillo

      Hi Dada,

      Sorry for this late reply. The sales are VAT-exempt (not subject to VAT). For the broker, he needs to pay income tax. My understanding is that you are an individual who is not a withholding agent so no need to withhold EWT on your payment to the broker.

      Best regards,
      Cherry

  • HMVargas

    Hello Ma’m Cherry,
    In your statement below, isn’t the last word supposed to be “buyer”?
    Herman

    Aside from the very painful payment of a lot of taxes, there may be a delay in the release of the Certificate Authorizing Registration (CAR) which you need in order for the title to the property to be transferred to the name of the seller.

    • http://www.foreclosurephilippines.com Jay Castillo

      Hi Herman, on behalf of my wife Cherry, I would like to thank you for catching that! I have already corrected it. Thanks again!