Land I can call my own: Tax procedures for real property acquisition

Acquisition happens via sale, donation, inheritance, a swap of ownership, or as payment of debt. Whatever the mode of transfer, ownership is only secure when the transferee’s name is annotated in the Transfer Certificate of Title (TCT), Condominium Certificate of Title (CCT) or Original Certificate of Title (OCT).

With the real estate boom of recent years, many have jumped on the bandwagon and purchasing property of their own. It therefore comes as no surprise that many have fallen into the trap of purchasing real properties which they cannot register in their names, either because they have not secured a Certificate Authorizing Registration (CAR) or the title to the property is bogus.

In other words many still fail to observe the processes prescribed by law. Others exercise due diligence too late, when penalties have already piled up.

On April 17, 2015, the Bureau of Internal Revenue (BIR) circularized the Memorandum of Agreement (MoA) between the Department of Finance, the Department of Justice, the BIR and the Land Registration Authority (LRA) dated Sept. 25, 2013. The MoA aims to plug all loopholes to prevent tax leakage and to properly ensure that all taxes due to the government are collected before registration or transfer of real property is effected by the Register of Deeds (RD). With the MoA, the concerned agencies undertake to expedite the delivery of services to the public and simultaneously, promptly collect the tax due.

The MoA focuses on inter-agency linkages to achieve better monitoring and control over real property transactions. The BIR’s role in achieving the MoA’s goal is to issue CAR, furnish reports on CAR issued and generated online to the RDs for online automated verification as to authenticity by LRA, and receiving and matching electronic reports from LRA on the New Number generated for the newly issued TCT/CCT/OCT.

On the other hand LRA and the RDs are to provide linkage, comparing information relating to all Real Property Transfers against the CARs issued by the BIR. The LRA shall also ensure the development, implementation, and operation of the online automated verification of the CARs presented to the RD through its Land Titling Computerization Project (LTCP). LRA shall also ensure, through the LTCP, the development, implementation, and operation of an automated system that shall provide BIR with monthly electronic reports on new TCT/CCT/OCT, immediately upon their issuance and inclusion.

It is fairly well known that the transfer of a real property requires the issuance of a CAR to the transferor. However, with enhanced communications among agencies, a finding of tax deficiency remains possible even after the real property is registered with the RD under the name of the transferee. To avoid this problem, the transferor must comply with the CAR requirement of the BIR. The parties must know what taxes they will have to pay for.

For instance, in a sale transaction, the owner will be required to pay capital gains tax (CGT) pursuant to Section 24 (D) in the case of an individual seller or Section 27 (D)(5) in the case of a corporate seller. It must be noted that the BIR shall compute the CGT liability of the seller based on the selling price, the fair market value based on the BIR’s zonal valuation, or the assessed value based on the tax declaration of the Local Government Unit which has jurisdiction of the real property, whichever is highest. Moreover, the documentary stamp tax (DST) pursuant to Section 196 of the Tax Code must be paid by any of the parties that have agreed to bear the tax liability.

It is also important to note the deadline within which the CGT returns or DST returns should be filed to avoid the running of the interest of the tax due. The DST should be paid on or before the 5th day of the next succeeding month when the deed of sale is executed. On the other hand, the CGT on sale, exchange or disposition of real properties treated as capital assets (those that are not actually used in the business) shall be filed within 30 days following each sale, exchange or disposition. It shall be filed and the taxes due thereon be made to an authorized agent bank in the appropriate revenue district.

In addition, sellers who convey their real properties which are considered ordinary assets shall report the sale as part of their income and subject the same to value-added tax. The buyer on the other hand, is required to subject the payment to expanded withholding tax which shall be filed on or before the 10th day of the next succeeding month when the deed is executed, subject, however, to the specific rules prescribed by Revenue Regulations No. 2-98, as amended, and the rules prescribed in the eFPS regulations, in case the taxpayer is duly registered with the same. The returns shall also be filed in the appropriate revenue district.

In 2003, the BIR issued Revenue Memorandum Order No. 15-2003 (RMC 15-2003) prescribing policies, guidelines and procedures in the processing of One-Time Transactions and the issuance of CAR on various transactions which include transfer of real properties. Taxpayers must be aware of the checklist of documentary requirements on sale of real property subject to CGT, foreclosure sale of real property, sale of real property classified as real assets, sale of real property under the Community Mortgage Program, tax-exempt sale of principal residence, transfer subject to donor’s tax, transfer subject to estate tax, and sale of real property under Socialized Housing Program as Certified by the HLURB. The BIR is strictly implementing RMC 15-2003 and non-compliance entails non-issuance of the CAR.

After the issuance of the CAR, the buyer must use it within one (1) year, otherwise it is considered revoked and the buyer must apply for CAR again.

The MoA opens a lot of doors towards responsible transfer of properties. The rules and regulations have been there for a long time, but many choose to ignore it. By ignoring these requirements, transferees cannot be wholly secure in their ownership and penalties keep piling up over time. Transferees of real property must be vigilant that the transferor has done everything to comply with his tax and other obligations with the BIR.

While investing in real property promises a brighter future for the investor, doing it the right way should be a primordial consideration to avoid future complications, the resolution of which consume a lot of time, money and peace of mind. After all, buying a little piece of that earth requires that we expend some of the fruits of our labor earned over many years.

Eliezer P. Ambatali is a tax associate with the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.

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