You may be planning to sell a real estate property. As an investor, it’s essential to be aware of the fundamentals of real estate transactions, like the taxes that come with selling a property.
The taxes imposed on the sale depend on the classification of the property sold. Under the law, a property is either an ordinary asset or a capital asset. In this article, we will discuss how ordinary vs. capital assets differ and the requirements for filing a capital gains tax return.
Ordinary Asset and Capital Asset Defined
For taxation purposes, a taxpayer’s asset is categorized as either ordinary or capital. Ordinary assets are those that are used for business purposes.
Under the Philippine Tax Code, ordinary assets refer to the following:
- Stock in trade
- Real property included in the taxpayer’s inventory and on hand at the close of the taxable year
- Real property for sale in the ordinary course of trade or business
- Real property used for trade or business subject to the depreciation allowance under Section 34(F) of the Tax Code
- Other real property used in trade or business
On the other hand, capital assets refer to real properties other than those categorized as ordinary assets. Capital assets may or may not be connected with the taxpayer’s trade or business.
Ordinary Assets in Real Estate
Based on Revenue Regulations No. 7-2003 issued by the BIR, all real properties held by a taxpayer engaged in real estate business are ordinary assets, even if they sit idle or are abandoned.
For taxpayers engaged in the real estate business, the following qualify as ordinary assets:
- Real property acquired by a real estate dealer
- Real property acquired by a real estate developer, whether developed or underdeveloped
- Real property for sale or lease in the ordinary course of trade or business
- Real property included in the taxpayer’s inventory (the property should be on hand at the close of the taxable year)
- Real property used in trade or business, whether a building, land, or other improvements
- Real property acquired by a real estate lessor—whether land or improvements—which is for lease or rent or being offered for lease or rent
- Real property acquired in the course of trade or business by a taxpayer habitually engaged in the sale of real estate properties
- Real property for use or being used in trade or business
How Ordinary Assets and Capital Assets Are Taxed
One distinction between ordinary assets vs. capital assets is the tax rate imposed on their sale. The National Internal Revenue Code provides for the tax rates as follows.
- Ordinary assets
The sale of an ordinary asset may be subject to a creditable withholding tax ranging from 1.5% to 6%, 12% value-added tax (VAT), and 1.5% documentary stamp tax (DST).
However, based on Revenue Regulations No. 8-2021, the sale is exempted from VAT if:
– The property is a residential house and lot with a selling price of Php3,199,200 or less.
– The property is a condominium with a selling price of Php3,199,200 or less.
If you fail to file the required return and settle the tax due on or before the deadline, you will be penalized with a surcharge of 25% of the basic tax due. In case of a fraudulent return or willful neglect to file the return, the penalty is 50% of the tax due.
Meanwhile, under the Tax Reform for Acceleration and Inclusion (TRAIN) Law, a 12% interest rate shall be charged for each year the capital gains tax remains unpaid.
- Capital assets
The sale of a capital asset is subject to a capital gains tax of 6% of the gross selling price or the current fair market value of the property, whichever is higher. Capital gains tax is not subject to VAT, regardless of the amount.
The sale is also subject to a DST of 1.5% of the actual consideration for the sale. Legal fees and other miscellaneous expenses must also be paid on top of the taxes.
When and How to File Capital Gains Tax Return: BIR Form 1706
The Bureau of Internal Revenue (BIR) requires that a Capital Gains Tax Return — or BIR Form 1706— be filed within 30 days following the sale. The seller or transferor must file the return with any authorized agent bank or Revenue Collection Officer of the Revenue District Office (RDO) that has jurisdiction over the sold property’s location. The tax amount must likewise be paid within the said period.
Alternatively, filing may be done using the BIR’s eFiling and Payment System. BIR accepts payments through GCash, credit cards, debit cards, or prepaid cards.
Documentary Requirements in Filing BIR Form 1706
Here are the primary documentary requirements that must be submitted along with BIR Form 1706 (Final Capital Gains Tax Return for Onerous Transfer of Real Property Classified as Capital Assets – Taxable and Exempt):
- Original copy and two photocopies of the TIN IDs of the seller and buyer
- Original copy and two photocopies of the notarized Deed of Absolute Sale or Deed of Transfer
- Original copy and two certified true copies of the Tax Declaration issued by the Local Assessor’s Office for land and improvements at the time or nearest to the date of the transaction
- Original copy and two certified true copies of the Original, Transfer, or Condominium Certificate of Title
- Original copy and two photocopies of notarized Special Power of Attorney from the transacting party, if the person signing is not one of the parties to the Deed of Transfer
- Original copy and two photocopies of Sworn Declaration of No Improvement by at least one of the transferees or Certificate of No Improvement issued by the Assessor’s Office, if applicable
- Original copy and two photocopies of the official receipt or deposit slip and duly validated return as proofs of payment of taxes
- Original copy and two photocopies of the Secretary’s Certificate or Board Resolution approving the sale or transfer of the real property, indicating the name and position of the authorized signatory to the Deed of Sale or Assignment, if the seller or transferor is a corporation
The additional requirements include the following:
- Original copy and two photocopies of a Special Power of Attorney, if the person processing the transfer is not a party to the transaction
- Original copy and two photocopies of a certification from the Philippine Consulate or Hague Apostille Convention, if executed abroad
- Original copy and two photocopies of a location plan or vicinity map, if the zonal value cannot be readily determined from the documents submitted
- Original copy and two photocopies of a Certificate of Exemption or BIR Ruling issued by the Commissioner of Internal Revenue or their authorized representative, if tax-exempt
- Original copy and two photocopies of other documents as may be required by law, rulings, or regulations
Meanwhile, for ante-dated sales, the requirement shall be the original copy and two certified true copies of the Deed of Sale, Assignment, or Exchange. Depending on where the notary public is registered, this document may be issued by the Clerk of Court of the city or municipality or Regional Trial Court. The Office of the Executive Judge of the city or municipality may also issue the document.
Alternatively, a certification of notarization from the National Archives Office may be submitted.
Documentary Requirements in Processing Electronic Certificate Authorizing Registration (eCAR) for Sale of Real Property
The following are the requirements for the issuance of an eCAR where the tax paid is based on the approved One-Time Transaction (ONETT) Computation Sheet:
- Original copy and two photocopies of tax returns filed with proof of payment—such as Revenue Official Receipt or duly validated bank deposit slip with certification from the authorized agent bank that received the tax payment—or Certificate of Tax Exemption
- Original copy and two photocopies of ONETT Computation Sheet of Tax Due approved by the authorized Revenue Officer
If the person processing the eCAR is not a party to the transaction, any of the following documents must be submitted in original copy and two photocopies:
- Notarized Special Power of Attorney
- Secretary’s Certificate or Board Resolution
- Certification from the Philippine Consulate or Hague Apostille Convention, if executed abroad
Navigating the Real Estate Selling Process
The sale of real estate property in the Philippines is taxed, and the seller must promptly file a tax return with the BIR after the sale. The tax rate — which is one significant difference between capital assets vs. ordinary assets — is based on the property’s classification.
The tax rate computation can make real estate selling and tax return filing complex. When technicalities complicate the process, you can always reach out to a real estate broker like RE/MAX Gold, a trusted real estate broker in the Philippines.
Contact us today to learn how we can help you sell your property with the highest possible market value!
