Seeking An Advice
Problem:
Hello everyone
I'm hoping I can get help/advice here even though I'm just a new member...
I'm starting in real estate biz (buy-and-sell properties po). I just bought my first property (house and lot) this January. Now, a buyer is really interested in the property. Here's his proposal:
1) He will pay me 30% of the amount of the property.
2) Yung 70% ay iba-bank loan daw.
3) Pero ang maglo-loan is me, the seller . All documents such as Income Statements are mine. In effect, I'd have a bank-loan against my property. I'm not even sure what type of loan should I apply for this.
4) He will issue checks for amortizations.
Here are my questions sana:
1) What could be the risks/sakit-ng-ulo in the said setup?
2) Should I already issue him a Deed of Absolute Sale upon payment of 30% downpayment?
The buyer is an OFW (seaman). The reason why he doesn't want to apply for the loan himself is that his requirements might not be complete.
Sana may magbigay ng opinions saken...somebody, anybody please...
Thanks very very much po
Bigcheese
Advice:
Let's make a clear picture regarding the inquiry of bigsheese through this example:
Let's say bigcheese has acquired the property for only Php 1M and plans to resell it for Php 1.7M.
Php 700K is target gross income, let's say.
Here comes the buyer, a seaman, who is willing to pay the 30% of Php 1.7M which is equal to Php 510K.
Bigcheese should do her task carefully, studying the capacity to pay of the buyer and requiring all the needed income documents. She did the work like a strict loan officer of the bank. She found out that the buyer has a PASSING CREDIT SCORE.
Bigcheese agreed but the condition is that they will execute a Contract To Sell. The balance of Php 1.19M shall be payable in 10 years. Interest rate of this rent-to-own scheme shall be 18% per annum. Monthly amortization of the buyer will now be Php 21,442.04. Post-dated checks shall be issued to Bigcheese. There are provisions in the contract at her own advantage such as all payments made and all costs of improvement are not refundable. There shall be a 10% penalty per month for late payments. Contract shall be rescind after two consecutive non-payment of monthly amortizations. Bigcheese's lawyer has carefully drafted the contract.
Bigcheese has applied for a real estate mortgage to her favorite bank and as a valued client, she got a loan approval of Php 1.19M for her property, payable in 10 years with fixed interest of 10% per annum. Her monthly amortization is equal to Php 15, 725.94.
After the loan release, bigcheese has now acquired her capital gains in full, which is Php 700K. (Php 510 DP of the seaman plus Php 1.19M loan release less the acquisition cost of Php 1M) Bank charges and processing fees shall be shouldered by the buyer.
Bigcheese, after earning Php 700K, still gains a passive income of Php 5,716.10 for ten years (Php 21,442.04 less Php 15,725.94). Real estate taxes and insurances shall be charged to the buyer.
In case the buyer has failed to pay two months rent (monthly amortization), bigcheese still owns the property. Transfer Certificate of Title (TCT) is still under her name.
Where is the risk? Bigcheese still owns the property. She can still resell it in case the Contract To Sell was rescind due to non-payment of the buyer.
As I always say, you cannot be a true real estate investor if you will not overcome FEAR.
F-alse
E-xpectations
A-ppearing
R-eal
Bigcheese, using her capital gains of Php 700k can buy another property, repeat the process like a cycle.
CONCLUSION: Proceed with the transaction (if it is like the given example above).
Sunday, August 29, 2010
Friday, August 27, 2010
What are the applicable taxes and fees that I have to pay? Value-added Tax
Except for sale of residential lots with gross selling price below P1,500,000 or of residential dwellings with gross selling price below P2,500,000, the sale of real property will be imposed a value added tax (VAT) at the rate of 12% of the purchase price, zonal value of market value under the Tax Declaration of the property, whichever is higher, payable on each sale of real property to the BIR.
Documentary Stamp Tax
Documentary Stamp Tax at the rate of 1.5% of the purchase price, zonal values, or the market values under the Tax Declaration of the property, whichever is higher, is payable to the BIR within ten (10) days after the close of the month when the DOS is signed and notarized.
Local Transfer Tax
Local transfer tax is imposed by the local government unit where the property is located generally at the rate of 50% of 1% of the purchase price, zonal value, or TD value of the property, whichever is higher.
Registration fees are payable to the Register of Deeds where the property is located at the rate of P8,796.00 for the first P1.7million plus P90.00 for every P20, 000.00 or fraction thereof in excess of P1.7 million.
Documentary Stamp Tax
Documentary Stamp Tax at the rate of 1.5% of the purchase price, zonal values, or the market values under the Tax Declaration of the property, whichever is higher, is payable to the BIR within ten (10) days after the close of the month when the DOS is signed and notarized.
Local Transfer Tax
Local transfer tax is imposed by the local government unit where the property is located generally at the rate of 50% of 1% of the purchase price, zonal value, or TD value of the property, whichever is higher.
Registration fees are payable to the Register of Deeds where the property is located at the rate of P8,796.00 for the first P1.7million plus P90.00 for every P20, 000.00 or fraction thereof in excess of P1.7 million.
What is a Contract to Sell (CTS), Deed of Sale (DOS), Transfer Certificate of Title (TCT), Condominium Owner’s Copy of Certificate of Title (CCT), and a Tax Declaration?
A Contract to Sell (CTS) is a contract document executed by both the seller and buyer where the seller promises and binds himself to sell to the buyer a certain property upon the occurrence of several conditions to be fulfilled by the buyer or both the seller and the buyer, the non-fulfillment of which releases both from their respective obligations under the terms of the contract. A contract to sell usually provides that title to and ownership of the property is not transferred to the buyer until full payment of the contract price.
A Dead of Sale (DOS). Upon the fulfillment of the conditions of the contract to sell, which is usually the full payment of the contract price, a Deed of Sale (DOS) is executed by the seller unconditionally transferring to the buyer title to and ownership of the property which is usually specifically described in terms of technical descriptions as contained in the existing certificate of title to the property. A deed of sale is an absolute conveyance of title of ownership from the seller to the buyer, without reservations or conditions, and is primarily executed by the seller and accepted by the buyer. The deed of sale also might contain certain restrictions on the use of the property by the owner as contained in a subdivision mother title or declaration of restrictions previously recorded in the original or existing transfer certificate of title. In the case of condominium units, it is accompanied by a certificate of the management body of the condominium project that such conveyance or sale is in accordance with the provisions of the declaration of restrictions of such project.
A Transfer of Certificate of Title (TCT) is an instrument issued by the Registrar of Deeds of the city or province where the land is located declaring the absolute owner of a certain real property technically described therein. The TCT is prepared and executed by said Registrar and delivered to the buyer of the property as new owner upon submission by the buyer of the Deed of Sale and payment of corresponding fees and taxes. It is an indefeasible and conclusive proof of absolute title to and ownership of the property not only between the seller and the buyer but also between the buyer and the rest of the world. However, the TCT may also contain certain restrictions on the exercise of ownership rights passed on from the previous TCT or mother title or liens and other forms of encumbrances.
A Condominium Owner’s Copy of Certificate of Title (CCT) is an instrument issued by the Registrar of Deeds of the city or province where the condominium project is located containing a brief description of the land, the condominium conveyed, and name and personal circumstances of the condominium owner. It is issued upon registration of the Deed of Sale conveying the condominium unit, payment of the proper fees, and annotation of the conveyance on the certificate of title covering the land included within the subdivision project. It is proof of title to and ownership of the condominium unit described therein.
A Tax Declaration is a city or municipal receipt containing description of a land the real estate tax of which has been paid under the name of the payor who may or may not have title to or ownership of the land being declared. It is a mere proof of possession of the land by the payor and not of ownership. It is not a title or certificate of ownership.
A Dead of Sale (DOS). Upon the fulfillment of the conditions of the contract to sell, which is usually the full payment of the contract price, a Deed of Sale (DOS) is executed by the seller unconditionally transferring to the buyer title to and ownership of the property which is usually specifically described in terms of technical descriptions as contained in the existing certificate of title to the property. A deed of sale is an absolute conveyance of title of ownership from the seller to the buyer, without reservations or conditions, and is primarily executed by the seller and accepted by the buyer. The deed of sale also might contain certain restrictions on the use of the property by the owner as contained in a subdivision mother title or declaration of restrictions previously recorded in the original or existing transfer certificate of title. In the case of condominium units, it is accompanied by a certificate of the management body of the condominium project that such conveyance or sale is in accordance with the provisions of the declaration of restrictions of such project.
A Transfer of Certificate of Title (TCT) is an instrument issued by the Registrar of Deeds of the city or province where the land is located declaring the absolute owner of a certain real property technically described therein. The TCT is prepared and executed by said Registrar and delivered to the buyer of the property as new owner upon submission by the buyer of the Deed of Sale and payment of corresponding fees and taxes. It is an indefeasible and conclusive proof of absolute title to and ownership of the property not only between the seller and the buyer but also between the buyer and the rest of the world. However, the TCT may also contain certain restrictions on the exercise of ownership rights passed on from the previous TCT or mother title or liens and other forms of encumbrances.
A Condominium Owner’s Copy of Certificate of Title (CCT) is an instrument issued by the Registrar of Deeds of the city or province where the condominium project is located containing a brief description of the land, the condominium conveyed, and name and personal circumstances of the condominium owner. It is issued upon registration of the Deed of Sale conveying the condominium unit, payment of the proper fees, and annotation of the conveyance on the certificate of title covering the land included within the subdivision project. It is proof of title to and ownership of the condominium unit described therein.
A Tax Declaration is a city or municipal receipt containing description of a land the real estate tax of which has been paid under the name of the payor who may or may not have title to or ownership of the land being declared. It is a mere proof of possession of the land by the payor and not of ownership. It is not a title or certificate of ownership.
Explanation of taxes and fees in the Philippines?
Explanation of taxes and fees in the Philippines?
(a) Real Property
Income Tax
If you are a corporation, or individual who is a Philippine resident, and engaged in real estate business, you will be subject to an ordinary income tax of up to 35% on the income derived from the sale of property. As a general rule, your buyer will be required to withhold 5% of the purchase price, zonal value or the market value under the Tax Declaration of the property, whichever is higher, and pay the same to the BIR to be credited to your potential income tax liability.
Capital Gains Tax
If you are a corporation or individual (whether a Philippine resident or not), not engaged in the real estate business and the property is not used in the ordinary course of your business, the property will be treated as a capital asset. As such, the sale shall be subject to capital gains tax at the rate of 6% of the purchase price, zonal value or the market value under the Tax Declaration of the property, whichever is higher.
Value-Added Tax
If you are engaged in the real estate business, the sale of real property is subject to value added tax at the rate of 12% of the purchase price, zonal value or market value under the Tax Declaration, whichever is higher, except where the property sold is a residential lot with price below P1,500,000 or a residential dwelling with price below P2,500,000.
If the Seller is a corporation or individual not engaged in the real estate business and the property was not used in the ordinary course of the corporation’s business, the sale is not subject to value-added tax.
Documentary Stamp Tax
Documentary stamp tax at the rate of 1.5% of the purchase price, zonal value, or TD value of the property, whichever is higher, is payable upon the execution of the DOS to the BIR.
Local Transfer Tax
Local transfer tax is imposed by the local government unit where the property is located generally at the rate of 50% of 1% of the purchase price, zonal value, or TD value of the property, whichever is higher.
Registration Fees
Registration fees are payable to the Registry of Deeds where the property is located at the rate of P8,796.00 for the first P1.7million, plus P90.00 for every P20,000.00 or fraction thereof in excess of P1.7 million.
(b) Sale of Shares in a Corporation Owning Real Property
The sale of shares is typically subject to the following transaction costs:
Capital Gains Tax
The sale of shares not traded through the stock exchange shall be subject to a final tax at the rate of 5% of the first P100,000.00 of net gain derived from the sale, and an additional 10% in excess thereof..
Documentary Stamp Tax
Documentary stamp tax on the transfer of shares are payable at the rate of 0.75 for every 200.00, or fraction thereof, based on the par value of the shares.
(c) Other Modes of Unloading Property
Ownership of assets (whether shares of stock or real property) may also be transferred through donation or succession.
The transfer of property by succession is subject to estate tax at a rate based on the total value of the net estate. The net estate is the total gross estate of the decedent less allowable deductions. For purposes of computing the gross estate, the fair market value of real property transferred by succession shall be the higher of the zonal value or the market value under the Tax Declaration of the real property. The estate tax imposed under Philippine tax laws shall be credited with any estate tax that the estate of the non-resident decedent may have paid to the authority of a foreign country, subject to certain limitations.
(a) Real Property
Income Tax
If you are a corporation, or individual who is a Philippine resident, and engaged in real estate business, you will be subject to an ordinary income tax of up to 35% on the income derived from the sale of property. As a general rule, your buyer will be required to withhold 5% of the purchase price, zonal value or the market value under the Tax Declaration of the property, whichever is higher, and pay the same to the BIR to be credited to your potential income tax liability.
Capital Gains Tax
If you are a corporation or individual (whether a Philippine resident or not), not engaged in the real estate business and the property is not used in the ordinary course of your business, the property will be treated as a capital asset. As such, the sale shall be subject to capital gains tax at the rate of 6% of the purchase price, zonal value or the market value under the Tax Declaration of the property, whichever is higher.
Value-Added Tax
If you are engaged in the real estate business, the sale of real property is subject to value added tax at the rate of 12% of the purchase price, zonal value or market value under the Tax Declaration, whichever is higher, except where the property sold is a residential lot with price below P1,500,000 or a residential dwelling with price below P2,500,000.
If the Seller is a corporation or individual not engaged in the real estate business and the property was not used in the ordinary course of the corporation’s business, the sale is not subject to value-added tax.
Documentary Stamp Tax
Documentary stamp tax at the rate of 1.5% of the purchase price, zonal value, or TD value of the property, whichever is higher, is payable upon the execution of the DOS to the BIR.
Local Transfer Tax
Local transfer tax is imposed by the local government unit where the property is located generally at the rate of 50% of 1% of the purchase price, zonal value, or TD value of the property, whichever is higher.
Registration Fees
Registration fees are payable to the Registry of Deeds where the property is located at the rate of P8,796.00 for the first P1.7million, plus P90.00 for every P20,000.00 or fraction thereof in excess of P1.7 million.
(b) Sale of Shares in a Corporation Owning Real Property
The sale of shares is typically subject to the following transaction costs:
Capital Gains Tax
The sale of shares not traded through the stock exchange shall be subject to a final tax at the rate of 5% of the first P100,000.00 of net gain derived from the sale, and an additional 10% in excess thereof..
Documentary Stamp Tax
Documentary stamp tax on the transfer of shares are payable at the rate of 0.75 for every 200.00, or fraction thereof, based on the par value of the shares.
(c) Other Modes of Unloading Property
Ownership of assets (whether shares of stock or real property) may also be transferred through donation or succession.
The transfer of property by succession is subject to estate tax at a rate based on the total value of the net estate. The net estate is the total gross estate of the decedent less allowable deductions. For purposes of computing the gross estate, the fair market value of real property transferred by succession shall be the higher of the zonal value or the market value under the Tax Declaration of the real property. The estate tax imposed under Philippine tax laws shall be credited with any estate tax that the estate of the non-resident decedent may have paid to the authority of a foreign country, subject to certain limitations.
Ways to save Capital Gains Tax
Care of http://www.philippine-portal.com/property-acquisition/guidelines.html
Fees and Taxes
As a buyer you need to budget for the transfer tax of 0.5%, registration fee of 0.25% and documentary stamp tax of 1.5% of the contract price, zoned value or fair market value, whichever is higher, of the property.
If you decide to sell your property, you will need to pay all unpaid taxes of the property, Agent/Broker’s fee (if sold through an agent), and the capital gain tax of 6% of the contract price of the property, which should be paid and submitted within 30 days after each sale, exchange, transfer or other disposition of real property. However, if you use the proceeds from the sale of a property to acquire or construct a new property within 18 months of sale or disposition, you are exempted from paying the final capital gains tax.
In most cases, estate agent fee is 5% of the sale amount of either residential or commercial property, which is paid by the seller.
In addition, your agent or broker can do the registration process without any additional payments.
Fees and Taxes
As a buyer you need to budget for the transfer tax of 0.5%, registration fee of 0.25% and documentary stamp tax of 1.5% of the contract price, zoned value or fair market value, whichever is higher, of the property.
If you decide to sell your property, you will need to pay all unpaid taxes of the property, Agent/Broker’s fee (if sold through an agent), and the capital gain tax of 6% of the contract price of the property, which should be paid and submitted within 30 days after each sale, exchange, transfer or other disposition of real property. However, if you use the proceeds from the sale of a property to acquire or construct a new property within 18 months of sale or disposition, you are exempted from paying the final capital gains tax.
In most cases, estate agent fee is 5% of the sale amount of either residential or commercial property, which is paid by the seller.
In addition, your agent or broker can do the registration process without any additional payments.
Taxes, Commission & Registration
Guide when Buying real Estate in the Philippines
This is the standard sharing of expenses between the buyer and the seller when transferring the real estate property title (TCT - Transfer Certificate of Title or CCT - Condominium Certificate of Title) to a new owner:
The SELLER pays for the:
Capital Gains Tax equivalent to 6% of the selling price on the Deed of Sale or the zonal value, whichever is higher. (Withholding Tax if the seller is a corporation)
Unpaid real estate taxes due (if any).
Agent / Broker's commission.
The BUYER pays for the cost of Registration:
Documentary Stamp Tax - 1.5% of the selling price or zonal value or fair market value, which ever is higher.
Transfer Tax - 0.5% of the selling price, or zonal value or fair market value, which ever is higher.
Registration Fee - 0.25% of the selling price, or zonal value or fair market value, which ever is higher.
Incidental and miscellaneous expenses incurred during the registration process.
The above sharing of expenses is the standard practice in the Philippines. However, buyers and sellers can mutually agree on other terms as long as it is done during the negotiation period (before the signing of the "Deed of Sale").
The "Deed of Sale" or "Deed of Absolute Sale" is the document showing legal transfer of real estate property ownership. The deed of sale is then taken to the Registry of Deeds to be officially recorded after paying the documentary stamp, transfer tax and registration fees. Always verify from the Registry of Deeds the authenticity of a Transfer Certificate of Title before buying a property. If the seller only has a tax declaration, be extra cautious and check with neighbours, the Barangay captain or anyone in the know in the community to verify the seller/owner's true identity and the property's history.
Your Agent / Broker will usually do the registration process (sometimes for a fee). However, all government taxes, transfer fees and incidental or miscellaneous expenses will be shouldered by the buyer.
Documents needed when transferring the title (TCT or CCT) to the new owner:
Certified true copy of the title
Notarized copies of the Deed of Sale
Latest tax declaration of the property
Certificate from the Bureau of Internal Revenue that the capital gains tax and documentary stamps have been paid
Receipt of payment of the transfer tax and registration fees
An adapted form of the "Torrens" system of land registration is used in the Philippines. The system was adapted to assure a buyer that if he buys a land covered by an Original Certificate of Title (OCT) or the Transfer Certificate of Title (TCT) issued by the Registry of Deeds, the same will be absolute, indefeasible and imprescriptible.
This is the standard sharing of expenses between the buyer and the seller when transferring the real estate property title (TCT - Transfer Certificate of Title or CCT - Condominium Certificate of Title) to a new owner:
The SELLER pays for the:
Capital Gains Tax equivalent to 6% of the selling price on the Deed of Sale or the zonal value, whichever is higher. (Withholding Tax if the seller is a corporation)
Unpaid real estate taxes due (if any).
Agent / Broker's commission.
The BUYER pays for the cost of Registration:
Documentary Stamp Tax - 1.5% of the selling price or zonal value or fair market value, which ever is higher.
Transfer Tax - 0.5% of the selling price, or zonal value or fair market value, which ever is higher.
Registration Fee - 0.25% of the selling price, or zonal value or fair market value, which ever is higher.
Incidental and miscellaneous expenses incurred during the registration process.
The above sharing of expenses is the standard practice in the Philippines. However, buyers and sellers can mutually agree on other terms as long as it is done during the negotiation period (before the signing of the "Deed of Sale").
The "Deed of Sale" or "Deed of Absolute Sale" is the document showing legal transfer of real estate property ownership. The deed of sale is then taken to the Registry of Deeds to be officially recorded after paying the documentary stamp, transfer tax and registration fees. Always verify from the Registry of Deeds the authenticity of a Transfer Certificate of Title before buying a property. If the seller only has a tax declaration, be extra cautious and check with neighbours, the Barangay captain or anyone in the know in the community to verify the seller/owner's true identity and the property's history.
Your Agent / Broker will usually do the registration process (sometimes for a fee). However, all government taxes, transfer fees and incidental or miscellaneous expenses will be shouldered by the buyer.
Documents needed when transferring the title (TCT or CCT) to the new owner:
Certified true copy of the title
Notarized copies of the Deed of Sale
Latest tax declaration of the property
Certificate from the Bureau of Internal Revenue that the capital gains tax and documentary stamps have been paid
Receipt of payment of the transfer tax and registration fees
An adapted form of the "Torrens" system of land registration is used in the Philippines. The system was adapted to assure a buyer that if he buys a land covered by an Original Certificate of Title (OCT) or the Transfer Certificate of Title (TCT) issued by the Registry of Deeds, the same will be absolute, indefeasible and imprescriptible.
Real Estate Transaction Cost
TRANSACTION COSTS
Sellers's Account
Capital Gains Tax 6%
Real Estate Agent's Fee 3% - 5%
Total Average 11%
Buyer's Account
Documentary Stamps Tax 1.50%
Transfer Tax 0.50%
Registration Fee 0.25%
Total Average 2.25%
Sellers's Account
Capital Gains Tax 6%
Real Estate Agent's Fee 3% - 5%
Total Average 11%
Buyer's Account
Documentary Stamps Tax 1.50%
Transfer Tax 0.50%
Registration Fee 0.25%
Total Average 2.25%
Monday, August 16, 2010
This is my eye opener about life.
This is a long read. I typed this summary as a post on a financial business forum. I thought I would repost it on my blog as an introduction for new readers. Many of the occurrences below are written about in detail throughout this blog. (Eventually, I will go through and link relevant blog posts to each event)
I had a normal education at the University of Illinois which ultimately ended with a Master’s in Engineering. I knew that I was in college to get the degree only because it meant getting a higher paying job. I got my first job out of college with a hefty $35k salary. After two years of measly raises, I jumped jobs and got paid about $42k. I was in the wireless industry building cell sites. I was there for one year when they were bought out by Alltel. The company was shutting down the Chicago office and moving everyone to Little Rock, AR.
This was my first realization that you can’t control your destiny in the corporate world. Luckily I got 6 months severance and landed a job the next day. I took my 6 months severance money and bought my first home in 1999. I started remodelling my home from day 1 and found out that I was really good at it. I knew nothing about real estate investing at this time.
During this dot com era, I changed jobs every year. Every company I went to went under, usually due to crazy overspending on lavish things, but I wasn’t going to complain about free health club memberships that cost $100/mo. Although I was changing jobs constantly and I knew that they were through no fault of mine I was having fun living the crazy dot com life, parties, cruises, beer trolleys…
I finally landed a job that felt like a lifer. It’s one of those jobs where you retire. I worked with a lady who had been there 35 years!
In 2001, my friends and I took a mountain biking trip to Crested Butte, CO. We camped for one week at Lake Irwin. No electric, cell phones, running water, etc… The town had a speed limit of 15mph. I remember cruising into town and slamming the brakes like WTF? However, at the end of 7 days, 15mph actually felt fast in town.
There was a point during the trip that I looked at my watch and calculated that it was 5:30pm in Chicago. At the time I was sitting on a rock on top of mountain at about 11,000ft having a PBJ sandwich with my buddies just chilling and looking at the clouds. If I were at work this week, I would be running down the street trying to catch my train at this time. What a contrast in speeds. It was at this moment that I knew something was wrong with my direction.
Coming back to work the next week I had lost all motivation. I had a great week in Crested Butte and we were all talking about going back the next year. I remember thinking, just another 51 weeks? I work 50 weeks a year to enjoy 2 weeks. Thinking deeper I also realized that I only enjoy Friday and Saturday out of the 7 days of the week. Doing the math, something wasn’t right. Why do we enjoy only 2/7 of our lives?
With this realization, my next thought was how do I enjoy life more. First answer, move to Crested Butte, CO. But homes there cost twice what mine does and salaries are 1/3.
I did a quick calculation on my finances at the time. Jeez, I had a huge house, 2 cars and all the materialistic things I could have ever wanted. I remember seeing on Oprah that families survive on $50k a year. Here I was single, making almost twice as much as that and I couldn’t save a penny. Somehow, one day I picked up Rich Dad Poor Dad. Reading that changed my life. I realized that I was tied to my job. I also realized that it was completely my fault.
I started looking into shifting my income from active to passive. This meant real estate, CDs, money market accounts and high dividend stocks. Anything that put $1 into my account at the end of the month with me doing anything, I was reading about.
I had goals in 2002 to lower my expenses and to buy a rental property. I was following the Rich Dad passive income = expenses means you are out of the rat race. Living in Chicago, I quickly realized that there weren’t that many positive cashflow properties out there. In addition, my mortgage on my huge house hindered my capabilities to get a loan on a rental property. I could not qualify for a investment loan so I failed my goals in 2002.
I knew I had to sell my primary residence to free up my cash. I completely remodeled the house in the fall of 2002. I also had to sell my Acura NSX. I loved this car so much, but I knew that selling was for a better future. I bought a pre-construction condo in Chicago that I calculated to have positive cashflow. It wouldn’t be completed for 2 years. I sold my NSX and put the money down on that condo.
I sold my car and home and all my furniture in 2003 and moved back in with my parents. I came home with a hefty check for over $100,000. Added my to savings, I had a significant wad of money.
I had read almost every single Kiyosaki book and every real estate rental book out there the past two years. It was 2004 and now that my expenses were nil, I was really getting sick of my job. I obviously didn’t want to stay at my parents house forever so I looked for a change.
I remember seeing on Loopnet that there were 4-plexes in Phoenix asking $150,000! I didn’t know anything about Phoenix. I thought it was all brown and desert. I had a friend living in LA. He said that I could live with him. So I quit my job and moved to LA. On the way to LA, I stopped by Phoenix and bought 2 condos in Scottsdale and a preconstruction house. Talk about impulse shopping! I had 4 properties and no job!
These buys were all based on cashflow. I was a cashflow guy. If COCR was above 10%, I was buying. The condos had Section 8 tenants and would cashflow $183/mo at the price I paid with 20% down. One day from moving out of Chicago and I was cashflowing $366/mo! This was easy. LOL
I didn’t really like living in LA. I was 30 minutes from the beach and real estate was crazy expensive. 4-flats were $1,000,000 and massively negative cashflow. I couldn’t stay with my friend forever and the LA RE market was booming. Then one of my Section 8 tenants got kicked off of Section 8. It was reported that she was a prostitute and on drugs. I got her evicted and went to view the condo, which was of course, trashed. I had to fix it back up to get it re-rented. In the process, it occurred to me that I should just move into it. That’s how I ended up in Phoenix.
The market in Phoenix went crazy during 2005. I literally hit the lottery. Homes were appreciating $10k per month. I made another preconstruction purchase based on the comps I felt I had $100k in equity at the purchase. My Chicago condo also closed with about $60k in equity.
In 2005 I had literally turned my networth into around $600k. However, I totally understood that this was pretaxed, pre-realtor commissioned money. Getting $600k cash in the bank was another story.
One day I was surfing craigslist when I came across an ad about preconstruction, cashflowing, mountain view townhomes in Salt Lake City. I made a call to the realtor, did some research online and decided that he wasn’t bullshiting. I booked a flight the new morning to SLC, rented a car and met the realtor. I drove the areas, looked at the rents and bought 2 townhomes at $140k. I found a property manager and hired them and my first PM’d rental was born. My calculations didn’t quite work out. My proforma rents were too high and I had accept lower rent. Turned out that both townhomes had break even cashflow. Well, one was -$7/mo. These townhomes have appreciated to $195k each, adding another $100k to my networth.
I also picked up a couple 1 acre lots in St. George, Utah. This was my first foray into land. In hindsight, I broke my cardinal positive cashflow rule. Buying land you are 99% assured negative cashflow.
2006 saw the downturn of the real estate market. This is where having positive cashflow or at least breakeven cashflow helps alot. I sold my lots in St. George at a loss of around $35k. I sold my condos in Scottsdale at the peak of the market. I sold one preconstruction house at about $65k below peak prices. My SLC and Chicago properties have held in value. My Phoenix properties have dropped huge. I’ve learned alot about value of geographic diversification.
My story doesn’t have many ups and downs like the other ones. However, some months are bad and some are very good. During the bad months you wonder if you should have stayed in the comfortable cubicle and lived the easy predefined life. The biggest thing I’ve learned is that you should take risks in life.
I do sometimes wonder what my life and networth would be if I stayed at my job in 2004. I think about what I’ve experiences in the past 3 years since quitting. I’m not talking about the money. I’m talking about living in LA, PHX, traveling to SLC, St. George and dozens of other cities that I ended up not buying anything in. My ex-co-workers used to call me and the first thing they said was, “Hey, what city are you in today?”
When I moved into my condo in Scottsdale, I experienced something for the first time in my life. I had lost the ambition for money. What I mean is the pursuit of making lots of money just to make money. I had a monthly payment of $600/mo which included all utilities. For all intensive purposes, I did not have to work for 10 years at my current burn rate. The need for money to pay bills was gone.
So now you wake up and what do you do? The answer is… anything you want! This is what many retirees face after 55 years. I faced it at 33. I had a new outlook on life. My main priority now was living life, I figure I have at least 50 years. Where does all the time go? LOL Money is important, but money is a means to live life. You shouldn’t live your life to get the money. If I want to travel the world, I find out what it costs and then go make that money. I look at money with a purpose. It’s purpose isn’t to sit in a bank. It’s purpose is for you to spend it on things that you enjoy.
http://www.livelearninvest.com/about-me/
I had a normal education at the University of Illinois which ultimately ended with a Master’s in Engineering. I knew that I was in college to get the degree only because it meant getting a higher paying job. I got my first job out of college with a hefty $35k salary. After two years of measly raises, I jumped jobs and got paid about $42k. I was in the wireless industry building cell sites. I was there for one year when they were bought out by Alltel. The company was shutting down the Chicago office and moving everyone to Little Rock, AR.
This was my first realization that you can’t control your destiny in the corporate world. Luckily I got 6 months severance and landed a job the next day. I took my 6 months severance money and bought my first home in 1999. I started remodelling my home from day 1 and found out that I was really good at it. I knew nothing about real estate investing at this time.
During this dot com era, I changed jobs every year. Every company I went to went under, usually due to crazy overspending on lavish things, but I wasn’t going to complain about free health club memberships that cost $100/mo. Although I was changing jobs constantly and I knew that they were through no fault of mine I was having fun living the crazy dot com life, parties, cruises, beer trolleys…
I finally landed a job that felt like a lifer. It’s one of those jobs where you retire. I worked with a lady who had been there 35 years!
In 2001, my friends and I took a mountain biking trip to Crested Butte, CO. We camped for one week at Lake Irwin. No electric, cell phones, running water, etc… The town had a speed limit of 15mph. I remember cruising into town and slamming the brakes like WTF? However, at the end of 7 days, 15mph actually felt fast in town.
There was a point during the trip that I looked at my watch and calculated that it was 5:30pm in Chicago. At the time I was sitting on a rock on top of mountain at about 11,000ft having a PBJ sandwich with my buddies just chilling and looking at the clouds. If I were at work this week, I would be running down the street trying to catch my train at this time. What a contrast in speeds. It was at this moment that I knew something was wrong with my direction.
Coming back to work the next week I had lost all motivation. I had a great week in Crested Butte and we were all talking about going back the next year. I remember thinking, just another 51 weeks? I work 50 weeks a year to enjoy 2 weeks. Thinking deeper I also realized that I only enjoy Friday and Saturday out of the 7 days of the week. Doing the math, something wasn’t right. Why do we enjoy only 2/7 of our lives?
With this realization, my next thought was how do I enjoy life more. First answer, move to Crested Butte, CO. But homes there cost twice what mine does and salaries are 1/3.
I did a quick calculation on my finances at the time. Jeez, I had a huge house, 2 cars and all the materialistic things I could have ever wanted. I remember seeing on Oprah that families survive on $50k a year. Here I was single, making almost twice as much as that and I couldn’t save a penny. Somehow, one day I picked up Rich Dad Poor Dad. Reading that changed my life. I realized that I was tied to my job. I also realized that it was completely my fault.
I started looking into shifting my income from active to passive. This meant real estate, CDs, money market accounts and high dividend stocks. Anything that put $1 into my account at the end of the month with me doing anything, I was reading about.
I had goals in 2002 to lower my expenses and to buy a rental property. I was following the Rich Dad passive income = expenses means you are out of the rat race. Living in Chicago, I quickly realized that there weren’t that many positive cashflow properties out there. In addition, my mortgage on my huge house hindered my capabilities to get a loan on a rental property. I could not qualify for a investment loan so I failed my goals in 2002.
I knew I had to sell my primary residence to free up my cash. I completely remodeled the house in the fall of 2002. I also had to sell my Acura NSX. I loved this car so much, but I knew that selling was for a better future. I bought a pre-construction condo in Chicago that I calculated to have positive cashflow. It wouldn’t be completed for 2 years. I sold my NSX and put the money down on that condo.
I sold my car and home and all my furniture in 2003 and moved back in with my parents. I came home with a hefty check for over $100,000. Added my to savings, I had a significant wad of money.
I had read almost every single Kiyosaki book and every real estate rental book out there the past two years. It was 2004 and now that my expenses were nil, I was really getting sick of my job. I obviously didn’t want to stay at my parents house forever so I looked for a change.
I remember seeing on Loopnet that there were 4-plexes in Phoenix asking $150,000! I didn’t know anything about Phoenix. I thought it was all brown and desert. I had a friend living in LA. He said that I could live with him. So I quit my job and moved to LA. On the way to LA, I stopped by Phoenix and bought 2 condos in Scottsdale and a preconstruction house. Talk about impulse shopping! I had 4 properties and no job!
These buys were all based on cashflow. I was a cashflow guy. If COCR was above 10%, I was buying. The condos had Section 8 tenants and would cashflow $183/mo at the price I paid with 20% down. One day from moving out of Chicago and I was cashflowing $366/mo! This was easy. LOL
I didn’t really like living in LA. I was 30 minutes from the beach and real estate was crazy expensive. 4-flats were $1,000,000 and massively negative cashflow. I couldn’t stay with my friend forever and the LA RE market was booming. Then one of my Section 8 tenants got kicked off of Section 8. It was reported that she was a prostitute and on drugs. I got her evicted and went to view the condo, which was of course, trashed. I had to fix it back up to get it re-rented. In the process, it occurred to me that I should just move into it. That’s how I ended up in Phoenix.
The market in Phoenix went crazy during 2005. I literally hit the lottery. Homes were appreciating $10k per month. I made another preconstruction purchase based on the comps I felt I had $100k in equity at the purchase. My Chicago condo also closed with about $60k in equity.
In 2005 I had literally turned my networth into around $600k. However, I totally understood that this was pretaxed, pre-realtor commissioned money. Getting $600k cash in the bank was another story.
One day I was surfing craigslist when I came across an ad about preconstruction, cashflowing, mountain view townhomes in Salt Lake City. I made a call to the realtor, did some research online and decided that he wasn’t bullshiting. I booked a flight the new morning to SLC, rented a car and met the realtor. I drove the areas, looked at the rents and bought 2 townhomes at $140k. I found a property manager and hired them and my first PM’d rental was born. My calculations didn’t quite work out. My proforma rents were too high and I had accept lower rent. Turned out that both townhomes had break even cashflow. Well, one was -$7/mo. These townhomes have appreciated to $195k each, adding another $100k to my networth.
I also picked up a couple 1 acre lots in St. George, Utah. This was my first foray into land. In hindsight, I broke my cardinal positive cashflow rule. Buying land you are 99% assured negative cashflow.
2006 saw the downturn of the real estate market. This is where having positive cashflow or at least breakeven cashflow helps alot. I sold my lots in St. George at a loss of around $35k. I sold my condos in Scottsdale at the peak of the market. I sold one preconstruction house at about $65k below peak prices. My SLC and Chicago properties have held in value. My Phoenix properties have dropped huge. I’ve learned alot about value of geographic diversification.
My story doesn’t have many ups and downs like the other ones. However, some months are bad and some are very good. During the bad months you wonder if you should have stayed in the comfortable cubicle and lived the easy predefined life. The biggest thing I’ve learned is that you should take risks in life.
I do sometimes wonder what my life and networth would be if I stayed at my job in 2004. I think about what I’ve experiences in the past 3 years since quitting. I’m not talking about the money. I’m talking about living in LA, PHX, traveling to SLC, St. George and dozens of other cities that I ended up not buying anything in. My ex-co-workers used to call me and the first thing they said was, “Hey, what city are you in today?”
When I moved into my condo in Scottsdale, I experienced something for the first time in my life. I had lost the ambition for money. What I mean is the pursuit of making lots of money just to make money. I had a monthly payment of $600/mo which included all utilities. For all intensive purposes, I did not have to work for 10 years at my current burn rate. The need for money to pay bills was gone.
So now you wake up and what do you do? The answer is… anything you want! This is what many retirees face after 55 years. I faced it at 33. I had a new outlook on life. My main priority now was living life, I figure I have at least 50 years. Where does all the time go? LOL Money is important, but money is a means to live life. You shouldn’t live your life to get the money. If I want to travel the world, I find out what it costs and then go make that money. I look at money with a purpose. It’s purpose isn’t to sit in a bank. It’s purpose is for you to spend it on things that you enjoy.
http://www.livelearninvest.com/about-me/
Sunday, August 15, 2010
Save Money On Taxes: Exemptions From VAT On The Sale And Lease Of Real Estate
Assuming that you already have a property which you intend to sell or lease out, it is important to know whether or not VAT applies to your real estate transactions, and how you can avoid the imposition of VAT. Same goes if you intend to buy a foreclosed property.
As a general rule, 12% VAT shall be imposed on the sale of goods and services. The VAT based for goods sold shall be the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor, while the VAT base for services sold shall be the gross receipts derived from the sale or exchange of services, including the use or lease of properties.
The exceptions to the general rule are enumerated in Section 109 of the Tax Code, as amended. The portions pertinent to real estate transactions are (P), (Q), and (V) of Section 109 quoted hereunder for your reference:
“(P) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, residential lot valued at One million five hundred thousand pesos (P1,500,000) and below, house and lot, and other residential dwellings valued at Two million five hundred thousand pesos (P2,500,000) and below: Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amounts herein stated shall be adjusted to their present values using the Consumer Price Index, as published by the National Statistics Office (NSO);
(Q) Lease of a residential unit with a monthly rental not exceeding Ten thousand pesos (P10,000): Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO);
xxx
(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): Provided, That not later than January 31, 2009 and every three (3) years thereafter. the amount herein stated shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO);
xxx” (underscoring ours)
The above provisions are explained further by Section 4.109-1(B)(p)(4) of Revenue Regulations (RR) No. 16-2005 which provides:
“Sec. 4.109-1 — VAT-Exempt Transactions. —
xxx xxx xxx
(B) Exempt transactions. —
(1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from VAT:
xxx xxx xxx
(p) The following sales of real properties are exempt from VAT, namely:
xxx xxx xxx
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. 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.“
(q) 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;
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 receipt
s 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.
The term ‘residential units’ shall refer to apartments and houses & lots used for residential purposes, and buildings or parts or units thereof used solely as dwelling places (e.g., dormitories, rooms and bed spaces) except motels, motel rooms, hotels and hotel rooms.
The term ‘unit’ shall mean an apartment unit in the case of apartments, house in the case of residential houses; per person in the case of dormitories, boarding houses and bed spaces; and per room in case of rooms for rent.”
I quoted the law itself and its implementing regulations because they are self-explanatory. I know I should start with the general rule but how to avoid the tax is more fun right?
Example No. 1:
Q: Person A is registered as a non-VAT taxpayer and she is leasing our a four-door apartment building earning annual receipts of less than P400,000.00. Each unit is leased out at P8,000.000 monthly. Will her gross receipts be subject to VAT or to percentage tax?
A: Her gross receipts will not be subject to both VAT and percentage tax. This was the case in BIR Ruling No. DA-150-07 dated March 9, 2007. The 3% percentage tax will only apply to persons whose sales or receipts are VAT-exempt under Section 109 (V) of the same Tax Code and are registered with the BIR as non-VAT entities. In this regard, considering that Person A leases her apartment units at P8,000.00 per unit monthly, she qualifies for VAT exemption under Section 109 (Q) of the Tax Code and not Section 109 (V). Section 109 (Q) expressly provides that leases of residential units with a monthly rental not exceeding Ten thousand pesos (P10,000.00) are not subject to VAT. Thus, Person A is not subject to either VAT or percentage tax.
If we follow the above logic, if a person always sells houses and lots at P2.5M and below and lots only at P1.5M and below, he will not be subject to both VAT and percentage tax. Not bad eh? REBAP President Julius Topacio, during a talk he delivered on the 2nd anniversary of REBAP-Marikina, said that sales of real estate below P3M and sales to OFWs will not be affected by the global recession. This is why I am concentrating on the low cost foreclosed properties.
Example No. 2:
Q: Person B is thinking of selling a house and lot which he bought at P2,000,000.00. What is the best selling price to avoid VAT?
A: P2,500,000.00 is the ceiling for sales not subject to VAT. If the selling price becomes P2,500,001, there shall be 12% VAT amounting to P300,000.12. See what a difference one peso makes?
As for the sale by a bank of its foreclosed properties, the BIR in BIR Ruling No. DA-216-07 dated April 4, 2007 noted that banks are exempt from VAT. In contrast, either CGT or CWT is always applicable to real estate transactions.
We will discuss the imposition of VAT on the sale of real property and lease in a separate post (no exceptions then!). This should give you enough nosebleed for one day.
As a general rule, 12% VAT shall be imposed on the sale of goods and services. The VAT based for goods sold shall be the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor, while the VAT base for services sold shall be the gross receipts derived from the sale or exchange of services, including the use or lease of properties.
The exceptions to the general rule are enumerated in Section 109 of the Tax Code, as amended. The portions pertinent to real estate transactions are (P), (Q), and (V) of Section 109 quoted hereunder for your reference:
“(P) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, residential lot valued at One million five hundred thousand pesos (P1,500,000) and below, house and lot, and other residential dwellings valued at Two million five hundred thousand pesos (P2,500,000) and below: Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amounts herein stated shall be adjusted to their present values using the Consumer Price Index, as published by the National Statistics Office (NSO);
(Q) Lease of a residential unit with a monthly rental not exceeding Ten thousand pesos (P10,000): Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO);
xxx
(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): Provided, That not later than January 31, 2009 and every three (3) years thereafter. the amount herein stated shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO);
xxx” (underscoring ours)
The above provisions are explained further by Section 4.109-1(B)(p)(4) of Revenue Regulations (RR) No. 16-2005 which provides:
“Sec. 4.109-1 — VAT-Exempt Transactions. —
xxx xxx xxx
(B) Exempt transactions. —
(1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from VAT:
xxx xxx xxx
(p) The following sales of real properties are exempt from VAT, namely:
xxx xxx xxx
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. 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.“
(q) 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;
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 receipt
s 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.
The term ‘residential units’ shall refer to apartments and houses & lots used for residential purposes, and buildings or parts or units thereof used solely as dwelling places (e.g., dormitories, rooms and bed spaces) except motels, motel rooms, hotels and hotel rooms.
The term ‘unit’ shall mean an apartment unit in the case of apartments, house in the case of residential houses; per person in the case of dormitories, boarding houses and bed spaces; and per room in case of rooms for rent.”
I quoted the law itself and its implementing regulations because they are self-explanatory. I know I should start with the general rule but how to avoid the tax is more fun right?
Example No. 1:
Q: Person A is registered as a non-VAT taxpayer and she is leasing our a four-door apartment building earning annual receipts of less than P400,000.00. Each unit is leased out at P8,000.000 monthly. Will her gross receipts be subject to VAT or to percentage tax?
A: Her gross receipts will not be subject to both VAT and percentage tax. This was the case in BIR Ruling No. DA-150-07 dated March 9, 2007. The 3% percentage tax will only apply to persons whose sales or receipts are VAT-exempt under Section 109 (V) of the same Tax Code and are registered with the BIR as non-VAT entities. In this regard, considering that Person A leases her apartment units at P8,000.00 per unit monthly, she qualifies for VAT exemption under Section 109 (Q) of the Tax Code and not Section 109 (V). Section 109 (Q) expressly provides that leases of residential units with a monthly rental not exceeding Ten thousand pesos (P10,000.00) are not subject to VAT. Thus, Person A is not subject to either VAT or percentage tax.
If we follow the above logic, if a person always sells houses and lots at P2.5M and below and lots only at P1.5M and below, he will not be subject to both VAT and percentage tax. Not bad eh? REBAP President Julius Topacio, during a talk he delivered on the 2nd anniversary of REBAP-Marikina, said that sales of real estate below P3M and sales to OFWs will not be affected by the global recession. This is why I am concentrating on the low cost foreclosed properties.
Example No. 2:
Q: Person B is thinking of selling a house and lot which he bought at P2,000,000.00. What is the best selling price to avoid VAT?
A: P2,500,000.00 is the ceiling for sales not subject to VAT. If the selling price becomes P2,500,001, there shall be 12% VAT amounting to P300,000.12. See what a difference one peso makes?
As for the sale by a bank of its foreclosed properties, the BIR in BIR Ruling No. DA-216-07 dated April 4, 2007 noted that banks are exempt from VAT. In contrast, either CGT or CWT is always applicable to real estate transactions.
We will discuss the imposition of VAT on the sale of real property and lease in a separate post (no exceptions then!). This should give you enough nosebleed for one day.
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