SAVINGS ON REAL ESTATE

RELATED TAXES
“The only way of finding the
limits of the possible is by
going beyond them into the
impossible”
 THE PRESENT LAW
(National Taxation)

The present law is the Tax Code of 1997, or also known as :

1. Republic Act No. 8424 [ RA 8424 ]

2. Tax Reform Act of 1997
3. National Internal Revenue Code of 1997
4. Tax Code of 1997
5. Comprehensive Tax Reform Program or CTRP

Effectivity of the Tax Code of 1997 :

January 1, 1998
 A. TAXATION - Definition

Taxation
is the inherent power of the sovereign State to
raise money or revenue necessary to finance
the functions and operations of the
Government.

“ lifeblood of government ”
 Nature of Taxation Power
The power of taxation is both inherent
and legislative in character.
• It is inherent because it has been reserved
by the State for itself to exercise. It is
possessed by the government without being
expressly conferred by the people. The
power is inherent in the people because of
sustenance of the government requires
contributions from them.
The power of taxation is legislative in
character because only the legislature can
make tax laws. The levying of taxes has
been characterized as the exercise of a high
act of sovereignty, to be performed only by
the legislature upon considerations of
policy, necessity and the public welfare.
 Aspects of Taxation
The first – Levy – deals with the provisions
of law which determine or work out the
determination of the person or property to
be taxed, the sum or sums to be raised, the
rate thereof, and the time and manner of
levying, receiving and collecting the taxes.
The second – collection – is constituted of
the provision of law which prescribed the
manner of enforcing the obligation on the
part of those taxed to pay the demand thus
created.
Forms of Escape from Taxation
There are six basic forms of escape from taxation.
They include:
(1) shifting;
(2) capitalization;
(3) transformation;
(4) evasion;
(5) avoidance; and
(6) exemption.
The first three are non-legal, the fourth illegal; and
the last two legal means of escape.
 Shifting
Shifting may be defined as the transfer of
the burden of a tax by the original payer or
the one on whom the tax was assessed or
imposed to another or someone else, who
bears it. Shifting is possible only in
connection with a price transaction, whether
of goods, services, or of the factors of
production.
There are three (3) kinds of shifting: forward,
backward, and onward.
• Forward shifting involves the transfer of the tax
from a factor of production through the factor of
distribution until the burden finally rests on the
consumer. When the tax is shifted forward, the
price which constitutes the vehicle for shifting will
increase thereby allowing the factor of production
to escape the burden of the tax. Example: The
developer may shift the tax to the contractor who
in turn shifts it to the real estate marketing
(retailer) who likewise shifts the tax to the final
consumer (buyer of property).
Backward shifting involves the transfer of the tax
from the point of consumption through the factors
of distribution to the factor of production. When
the tax is shifted backward, the price which
constitutes the vehicle for shifting will decrease as
compared with what is would have been.
Example: The consumer may shift the tax to the
retailer by refusing to purchase unless the price is
reduced, and the later may in turn shift the tax to
the wholesaler who finally shifts the tax to the
manufacturer.
There is onward shifting when the tax is
transferred two or more times through the
factors of distribution or production.
Onward shifting may, therefore, be
forwarded or backward. Example: A
transfer from producer to wholesaler is a
shift, the transfer from wholesaler to
retailer is another shift; and when there are
two or more shifts there is onward shifting.
 Capitalization
Tax capitalization is a special form of backward
shifting. It occurs in cases where the good is a
durable good, and thus is subject to a series of
successive annual taxes during its lifetime. If the
whole series of future taxes on the good is to be
shifted backward at the time of purchase, the
future taxes must be capitalized and deducted in a
lump sum from the price offered. This must
necessarily be so far there will be no later
opportunity for backward shifting.
 Transformation

This form of escape is effected through the

process of production. In order not to lose his
market, the producer/developer upon whom a tax
has been imposed, instead of shifting it, may pay
the tax himself and recover the additional expense
by improving his process of production thereby
turning out units of his product/project at a lower
cost.
 Evasion

Tax evasion may be defined as illegal effort to

avoid payment of a tax, such for example as the
failure to report taxable income or property. Tax
evasion is synonymous with tax dodging. It is
punishable by law.
Evasion of the tax takes place only when there are
no proceeds. If the tax is evaded in part, there are
no proceeds as to the part which is evaded.
Evasion of taxation is tantamount, fiscally
speaking, to the absence of taxation.
 Avoidance

Tax avoidance may be defined as the exploitation

by the taxpayer of legally permissible alternative
tax rates or methods of assessing taxable property
or income, in order to reduce tax liability. The
term may be extended to include situation where a
person refrains from engaging in some activity or
enjoying some privilege in order to avoid the
incidental taxation; for example, failure to import
goods because of unwillingness to pay the duty.
Tax avoidance is also known as tax minimization.
Evasion should be applied to the escape
from taxation accomplished by breaking the
letter of the law, like deliberate omission to
report a taxable item. Avoidance covers
escape accomplished by legal procedures
which may be contrary to the intent of the
sponsors of the tax law, but nevertheless do
not violate the letter of the law.
 Exemption
The power to prescribe what shall be taxed implies
the power to prescribe what shall be exempt. It is
inherent in the exercise of the power to tax that
the sovereign State be free to select the subjects
of taxation and to grant exemptions there from,
and unless restrained by some particular
provisions of the Constitution, the legislature has
full power to exempt any person or corporation or
class of property from taxation, according to its
views of public policy and expediency.
An exemption from taxation is the grant of
immunity to particular persons or
corporation or to persons or corporation of a
particular class from a tax upon property or
an excise which persons and corporations
generally within the same district are
obliged to pay.
 LAWS GOVERNING
REAL PROPERTY TAXATION

NATIONAL TAXATION LOCAL GOVERNMENT

( TAX CODE OF 1997) TAXATION
(Local Government Code of 1991)
 REAL PROPERTY TAXATION
NATIONAL TAXATION
TAX CODE OF 1997

Capital Gains Tax

Documentary Stamp Tax
Donors & Estate Tax
Income Tax
Percentage Tax
Valued Added Tax
 REAL PROPERTY TAXATION
LOCAL GOVERNMENT TAXATION
Local Government Code of 1991
Real Property Tax
Special Levies on Real Property
Special Education Fund
Ad Valorem Tax on Idle Land
Local Taxes and Fees
Transfer Tax
Business Tax
Registration Fee
 BASIC PENALTY FOR
LATE FILING AND
PAYMENT OF TAXES
PENALTY - 25% Surcharge on basic tax due
- 50% Surcharge in case of fraud or
intent to evade tax

INTEREST - 20% per annum based on basic

tax due
 EXEMPTION FROM CAPITAL GAINS TAX
ON SALE OF PRINCIPAL RESIDENCE

The sale of your principal residence may be exempted from

capital gains tax, subject to the following conditions:

1. Sale or disposition of principal residence

2. By natural person
3. Proceeds of which is fully utilized in acquiring or constructing
a new principal residence within eighteen (18) calendar
months from the date of sale or disposition
4. The historical cost or adjusted basis of the real property sold
or disposed shall be carried over to the new principal
residence built or acquired
 18 Calendar
Months

P 5,000,000
P 2,000,000
X 6%
__________
P 120,000.00 CAPITAL GAINS TAX EXEMPTION
5. The Commissioner shall have been duly notified by
the taxpayer within thirty (30) days from the date of
sale or disposition

6. The said tax exemption can only be availed of

once every ten (10) years.

7. Execution of Escrow Agreement

8. If there is no full utilization of the proceeds of sale or

disposition, the portion of the gain presumed to have
been realized from the sale or disposition shall be
subject to capital gains tax.
 18 Calendar
Months

P 1,500,000
P 2,000,000
X 6% Unutilized Amount - ( P 500,000.00)
__________
P 120,000.00 Capital Gains Tax - P 30,000
SURCHARGE - 7,500
Interest Penalty [ 1yr.] - 6,000

TOTAL - P 43,500
 EXEMPT TRANSACTIONS FROM VAT
( As per BIR Revenue Regulations No. 16-2005
dated September 1, 2005)

The following sales of real properties are

exempt from VAT, namely:
( Par. (B)(10(p), Sec. 4.109.1, BIR RR 16-2005)

(1) Sale of real properties not primarily held

for sale to customers or held for lease in the
ordinary course of trade or business.
VAT – EXEMPT . . .

LOW-COST HOUSING

(2) Sale of real properties utilized for low-cost housing as

defined by RA No. 7279, otherwise known as the “Urban
Development and Housing Act of 1992” and other related
laws,such as RA No. 7835 and RA No. 8763. ( P 750,000.00)

SOCIALIZED HOUSING

(3) Sale of real properties utilized for socialized housing as

defined under RA No. 7279, and other related laws, such
as RA No. 7835 and RA No. 8763, wherein the price ceiling
per unit is P225,000.00 or as may from time to time be
determined by the HUDCC and the NEDA and other related
laws.
(4) Sale of residential lot valued at One Million Five
Hundred Thousand Pesos (P1,500,000.00) and below,

Or

• house & lot and other residential dwellings valued at Two

Million Five Hundred Thousand Pesos (P2,500,000.00)
and below where the instrument of sale/transfer/
disposition was executed on or after July 1, 2005;

Provided, That not later than January 31, 2009 and every three (3) years
thereafter, the amounts stated herein shall be adjusted to its present value
using the Consumer Price Index, as published by the National Statistics
Office (NSO); Provided, further, that such adjustment shall be published
through revenue regulations to be issued not later than March 31 of
each year;
If two or more adjacent residential 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 do not exceed P1,500,000.00.

LOT 11 LOT 12

P 900T P1.0 M

Adjacent residential lots, although covered by separate titles and/or

separate tax declarations, when sold or disposed to one and the
same buyer, whether covered by one or separate Deed of
Conveyance, shall be presumed as a sale of one residential lot.
P 900 T + P 1.0 M = P 1.9 M ( VAT )
 LEASE OF RESIDENTIAL UNITS –
VAT EXEMPT

Lease of residential units with a monthly rental

per unit not exceeding
Ten Thousand Pesos (P10,000.00),
regardless of the amount of aggregate rentals
received by the lessor during the year;

Provided, that not later than January 31, 2009 and every
three (3) years thereafter, the amount of P10,000.00 shall be
adjusted to its present value using the Consumer Price
Index, as published by the NSO;
Residential Apartments – P 9,500 per month rental

250 units

P 9,500 X 250 = P 2,375,000

X 12 = P 28,500,000

EXEMPTED FROM VAT

 < P 1,500,000 = VAT EXEMPT

The foregoing notwithstanding, lease of residential

units where the monthly rental per unit exceeds
Ten Thousand Pesos (P10,000.00) but the
aggregate of such rentals of the lessor during the
year do not exceed One Million Five Hundred
Pesos (P1,500,000.00) shall likewise be exempt
from VAT,

however, the same shall be subjected to three

percent (3%) percentage tax.
 In cases where a lessor has several residential units for lease,
some are leased out for a monthly rental per unit of not
exceeding P10,000.00 while others are leased out for more than
P10,000.00 per unit, his tax liability will be as follows:

1. The gross receipts from rentals not exceeding P10,000.00 per

month per unit shall be exempt from VAT regardless of the
aggregate annual gross receipts.

2. The gross receipts from rentals exceeding P10,000.00 per

month per unit shall be subject to VAT if the aggregate annual
gross receipts from said units only (not including the gross
receipts from units leased for not more than P10,000.00)
exceeds P1,500,000.00.
Otherwise, the gross receipts will be subject to the 3% tax
imposed under Section 116 of the Tax Code.
GENERAL RULE

(v) Sale or lease of goods or properties or the performance of

services other than the transactions mentioned in the
preceding paragraphs, the gross annual sales and/or
receipts do not exceed the amount of

One Million Five Hundred Thousand Pesos

( P1,500,000.00 );
Provided, That not later than January 31, 2009 and every three (3)
years thereafter, the amount of P1,500,000.00 shall be adjusted to
its present value using the Consumer Price Index, as published by
the NSO.
For purposes of the threshold of P1,500,000.00, the husband
and the wife shall be considered separate taxpayers.
However, the aggregation rule for each taxpayer shall
apply.

For instance, if a professional, aside from the practice of his

profession, also derives revenue from other lines of
business which are otherwise subject to VAT, the same
shall be combined for purposes of determining whether the
threshold has been exceeded. Thus, the VAT-exempt sales
shall not be included in determining the threshold.

P 800,000 + P 1,000,000

TOTAL = P1,800,000 VAT

Taxes are truly the lifeblood of the nation as without funds,
the government cannot fulfill its varied functions – nay,
cannot continue to exist. It is, therefore, important that the
people are made aware of their obligation to pay taxes
willingly and promptly. Indeed, the best tax laws can only
be as good as our response to them.

Surveys show that a very significant factor for our poor tax
collections is the apparent unawareness of most taxpayers
of existing tax laws, rules and regulations. With taxes
increasing both in rate and variety, it becomes all the more
pressing to wage an effective dissemination of information
on taxation that will permeate all strata of our society not
least, the youth, for someday, they too will have to share
the tax burden. (Ernesto M. Angeles, CPA)
“Always do what you are afraid to do”
THANK YOU!