If you plan to sell a real estate property in the Philippines, then you may have heard of capital gains tax in conversations with family and friends. Like many others, homeowners and businesses use real properties as real estate investments in the Philippines. For Overseas Filipino Workers (OFWs) who use their house and lot in the Philippines to earn passive income, you may have already heard about capital gains taxes and how to pay capital gains tax. If not, you should learn about certain taxes instead of just renting out your property.
Under sections 24C, 24D, 27D(2), 27(D5), 28(A)(7)(c), 28(B)(5)(c), and 39A of the Philippine Bureau of Internal Revenue (BIR), capital gains tax is imposed tax on the profit by the seller from the sale of real estate properties identified as capital assets. Whether you are new to real estate investment in the Philippines or not, paying for the capital gains tax falls under the responsibility of the seller. As OFW investors, it’s important to understand capital gains tax rates.
If you plan to sell your real estate properties in the long run, then you need to identify if the property you are selling falls under capital assets or not.
What is Capital Asset?
According to the National Bureau of Internal Revenue section 39, capital assets are real estate properties held by a taxpayer that is not connected to his trade or business. Capital assets are liable for capital gains tax. But ordinary assets are not subjected to capital gains tax.
Ordinary assets are considered:
- Stocks in trade of a taxpayer or other real property
- Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business
- Real property used in trade or business is subjected to depreciation
- Real property used in trade or business of the taxpayer
Buying real properties on foreclosure is also considered an ordinary asset.
How is capital gains tax calculated on sale of property?
Becoming aware of how much you pay for your capital gains tax is important. Capital gains tax is not exactly cheap especially if you want an income from real estate investments in the Philippines.
To know how to compute the capital gains tax on the sale of a property, the city assessor determines the value of your real estate property. They take note of the value of the real estate property based on the selling price, fair market value, or zonal value, whichever is higher.
For example, you have a 200 square meter residential real estate property in Makati City you are selling for Php 8,500,000. If your selling price is higher than the real estate property’s fair market value, then it is used to compute the capital gains tax.
Capital Gains Tax Calculator on Sale of Property
According to the National Bureau of Internal Revenue section 24D, the capital gains tax rate is 6% of the property’s selling price.
To calculate the capital gains tax, you check the value of the property or its current fair market value, whichever is higher, and multiply that by 6%.
For example, if the property is valued at Php 1,000,000 – you multiply that by 6% and the total sum of capital gains tax the seller pays is Php 60,000.
Php 1,000,000 x 6% = Php 60,000
In short, the computation formula is:
Property value/current fair market value (whichever is higher) x 6% = capital gains tax amount
How to Avoid Capital Gains Tax on Real Estate
Some real estate sellers may want to avoid paying capital gains tax. After all, it is not exactly cheap. Fortunately, there are a few legal ways to avoid paying capital gains tax on the sale of real estate property.
Rental Property
One option is to engage in the business of renting real properties. You need to declare yourself as the legal lessor of the properties and BIR will consider you as involved in the business of real estate properties.
For example, if you hold your properties and rent them out, you can likely sell them off as a business sale transaction, and avoid paying capital gains tax on real estate. Additionally, you gain more profit in the long run through your rental income business.
Principal Residence
According to revenue regulations no. 13-99 section 2(2), certain individuals are exempted from capital gains tax on the sale of a principal residence under certain conditions. The principal residence is defined as the seller’s family home or permanent residence.
The criteria for being exempted from capital gains tax on the sale of principal residence is as follows:
- Sworn Declaration Requirement – He shall submit a Sworn Declaration of his intent to avail of the tax exemption over the location of the principal residence within 30 days from the date of its sale
- Post Reporting Requirement – The proceeds from the sale, exchange, or disposition of his principal residence must be fully utilized in acquiring or constructing his new principal residence within 18 calendar months from the date of its sale
- The tax exemption is only available once every 10 years
- The historical cost or adjusted basis of his old principal residence sold shall be carried over to the cost basis of his new principal residence
- If there is no full utilization of the proceeds of the sale of his old principal residence for the acquisition or construction of his new principal residence, he shall be liable for the deficiency capital gains tax.
What other properties or conditions are exempted from capital gains tax?
- Dealer in securities, regularly engaged in buying and selling of securities
- An individual exempt from the payment of income tax under existing investment incentives
- An individual or non-individual exchanging real property solely for shares of stocks resulting in corporate control
- Government-owned or control corporation selling real property
- If the disposition of the real property is gratuitous in nature
- Where the disposition is pursuant to Comprehensive Agrarian Reform Program (CARP) law
For more inquiries and concerns, chat with our Vistaland International Agents today!
Want to know about other real estate taxes and who pays for them? As the international marketing division of Vista Land, Vistaland International will equip you with the knowledge you need when it comes to real estate investments in the Philippines. You can browse through our FAQs page to know a bit more about us.
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Vistaland International Marketing, Inc. (VIMI) is the international marketing division of Vista Land. Aiming to provide OFWs and migrant Filipinos a home in the Philippines, VIMI has established long-lasting relationships with brokers and clients around the world.
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