VAT Update: Adjacent residential properties are now considered as one under BIR RR 13-2012

If you are thinking of buying adjacent residential properties, you better read this. The Bureau of Internal Revenue (BIR) has recently issued BIR Revenue Regulations (RR) No. 13-2012 dated October 12, 2012 which amends the current Value-Added Tax (VAT) regulations.

Under RR 13-2012, the sale of two or more adjacent lots, houses and lots, and other residential dwellings like condominium units, shall be considered as one residential area for VAT purposes.

You may recall that the sale of a lot which is an ordinary asset to the seller at a price below P1,919,500, and the sale of a residential house and lot which is an ordinary asset to the seller at a price below Php3,199,200, are exempt from VAT. Under the regulations, only the sale of adjacent lots by the same seller to the same buyer shall be considered as one residential area for VAT purposes. Thus, the sale of two adjacent lots priced at Php1 million each (for a total of Php2 million) will go over the VAT threshold of P1,919,500 for the sale of residential lots.

 “Loopholes” plugged

Previous to RR 13-2012, it was not clear whether the sale of adjacent residential houses and lots, and other residential dwellings such as condominium units, shall be considered as one residential area for VAT purposes. Thus, developers have exploited this loophole and sold adjacent condominium units to one buyer, but without considering the sale as the sale of a single residential area for VAT purposes.

Also, previous to RR 13-2012, it was not clear what the time difference between two sales to the same buyer should be, for the two sales to be considered as the sale of one residential area. So for example, if the sale of one residential lot was done in January 2012, and the next sale was done in March 2012, it may be argued that it would not fall under the rule on treating the sale of two lots to one buyer as the sale of one residential area for VAT purposes.

With RR 13-2012, the above loopholes have been plugged.

Now what!?

We can only guess at this point what this new RR will bring – probably:

1. Developers will sell more adjacent one-bedroom or studio units before the RR takes effect, which is after fifteen (15) days following complete publication in a newspaper of general circulation;
2. Developers will lengthen the reservation period for the adjacent unit to a little over 12 months to get around the 12-month period; or
3. Developers will suggest that buyers to let another family member buy the adjacent unit.

Does this affect foreclosed properties?

As far as I know, the sale of foreclosed properties by banks are not covered by VAT . But if you are a real estate investor who buys and sells residential foreclosed properties, you might be affected. See below.

Does this affect real estate investors?

Yes, if you are considered as a person who is habitually engaged in the business of real estate as defined in  RR 7-2003, and if you buy/sell adjacent residential properties with a combined selling price that exceeds the VAT threshold.

Read BIR Revenue Regulations No. 13-2012

A copy of RR No. 13-2012 can be downloaded from BIR’s website or through this link.

What to read next to learn more about VAT:

• What you need to know about Value-Added Tax (VAT) on the sale of Real Estate
• Threshold for VAT exemptions to be increased effective January 1, 2012

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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 © 2012 All rights reserved.

Full disclosure: Nothing to disclose.