TAX CONSEQUENCES OF REALTY COMPANIES

A. TAXES ON REAL PROPERTY

If the seller or transferor is a real estate dealer, the real property sold is an
ordinary asset, and the gain, if any, is subject to the graduated income tax (if an
individual who is a citizen, or a resident or non-resident alien engaged in trade or
business in the Philippines, or 25% final tax if a non-resident alien not engaged in trade
or business in the Philippines), or to the normal corporate income tax (if a domestic
corporation or a resident foreign corporation).1 Non-resident foreign corporations are
taxed on their gross income from sources within the Philippines, including gain from sale
of real property.
A real estate dealer includes any person engaged in the business of buying,
developing, selling, exchanging real properties as principal and holding himself out as a
full or part-time dealer in real estate.
Value-Added Tax on Real Property
There shall be imposed a 12% value-added tax (VAT) on real estate sales of those
who are engaged in the business of selling, developing, leasing or sub-leasing of real
property and those licensed to engage in real estate brokerage business based on their
commission. However, in pursuance to RR No. 4-07, even if the real property is not
primarily held for sale to customers or held for lease in the ordinary course of trade or
business but the same is used in the trade or business of the seller, the sale thereof shall
be subject to VAT being a transaction incidental to the taxpayers main business.2
In determining the transactions subject to VAT, the following threshold must be
considered:
Type of Property Sold

VAT-exempt

Residential Vacant lot

P 1,919,500 and below

Residential House & lot

P 3,199,200 and below

Residential Condominium unit

P 3,199,200 and below

Commercial properties are subject to VAT3

Sec. 24 (A), Sec. 25 (A)(1) and (B), and Sec. 27 (A), Sec. 28 (A)(1) and (B)(1), NIRC.

The Basic Taxes Involved in a Sale of Real Estate Property, available

at:http://philpropertyexpert.com/the-basic-taxes-involved-in-a-sale-of-real-estate-property/
3
RR NO. 16-2011, October 27, 2011

Please note that real estate sales that are exempt from VAT based on the above
threshold shall be subject to 3% percentage tax. However, if the seller is a VAT-registered
person, the sale of his ordinary asset shall be subject to VAT even if the sales made are
within the prescribed threshold.
Further, a person should register as a VAT entity if his gross annual sales and/or
receipts exceed P 1,919,500.00 in a year.
The tax base of 12% output VAT is the highest among the (1)selling price,
(2)Bureau of Internal Revenue (BIR) zonal value, and (3)assessed value by the
provincial/city assessor and the time of payment will depend whether the sale is an
installment sale or a cash sale.
Documentary Stamp Tax on Real Property
The documentary stamp tax is an excise tax levied on documents, instruments,
loan agreements and papers evidencing the acceptance, assignment, sale or transfer of an
obligation, rights, or property incident thereto.
The amount of tax is either fixed or based on the par or face value of the
document or instrument. In the case of the sale of real estate properties, the rate shall
be 1.5% based on the highest among the (1) Selling price, (2) Bureau of Internal
Revenue (BIR) zonal value, and (3) Assessed value by the provincial/city assessor.4
B. TAXES ON SALE OR EXCHANGE OF SHARES OF STOCK
If the seller or transferor is not a dealer in securities, the shares of stock are
regarded as capital assets. There is a need to determine if the shares of stock are listed
and traded in the Philippine Stock Exchange.
If the shares of stock are listed and traded If the shares of stock are not listed, or they
in the local stock exchange.
are listed but not traded in the local stock
exchange.
The transaction is exempt from income The net capital gains realized during the
tax, regardless of the nature of business of year, if any, shall be subject to the final
the seller or transferor (individual or capital gains tax equivalent to 5% of the
corporation). However, it is subject to the net capital gains not exceeding P100, 000,
one-half of one percent (1/2 of 1%) stock and 10% on any amount in excess of P100,
transaction tax imposed in Section 127(a) 000.6 An annual capital gains tax return
4

The Basic Taxes Involved in a Sale of Real Estate Property, available at:http://philpropertyexpert.com/thebasic-taxes-involved-in-a-sale-of-real-estate-property/

of the 1997 Tax Code, based on the gross must be filed by the taxpayer, covering all
selling price or gross value in money of the his tock transactions during the calendar
shares of stock sold or transferred.5
year, not later than April 15 of the
following year.7 The effect of this provision
is to allow the taxpayer to claim the lower
rate of 5% only on the first P100, 000 gross
sales. Take not that it does not matter who
is the seller or transferor (whether he is an
individual (citizen or alien) or a corporation
(domestic or foreign), provided he/it is not
a dealer in securities, except in the case of a
non-resident alien individual not engaged
in trade or business in the Philippines
whose capital gain shall be taxed at 25% of
his gross income under Section 25(B) of
the Tax Code.

Stock transaction tax of fo 1% of gross selling price was increased to of 1% by R.A. No. 7717 and
made part of Section 127-A of the Tax Code.
6
Sec. 24 (C) and Sec. 25 (A)(3); Sec. 27 (D)(2) and Sec. 28 (A)(7)(c) and Sec. 28 (B)(5)(c), NIRC.
7
Rev. Regs. No. 2-82.