Effective Tax Rate on Rental Income
|Click here to see a worked example|
|Source: Punongbayan & Araullo Disclaimer|
Nonresident (i.e. whose stay in the country does not exceed 180 days) foreigners are liable to tax on their Philippine-sourced income. Married couples are required to compute their individual income tax liability separately but they must file a joint tax return.
Nonresident foreigners are classified depending on business activities and the applicable taxation rules depend on this classification:
Acquisition and ownership of land in the Philippines is restricted to Philippine citizens or corporations (at least 60% of equity is owned by Filipinos). To acquire ownership or a land, residential house and lot, or commercial building and lot, foreign investors may have to establish or invest in an existing Philippine corporation but in no case should their equity exceed 40% of the total capital of the corporation. However, a foreign investor may own condominium units or a townhouse (provided that the land on which the property is built is owned by a Filipino or a corporation of which at least 60% of the equity is owned by Filipinos).
Computation of taxable income as well as applicable income tax rates depend on the nonresident’s classification, whether they are engaged in business in the country or not.
Non-resident foreigners engaged in trade or business in the Philippines: net income is taxed at progressive rates. Taxable income is computed by deducting income-generating expenses and personal allowances from gross income.
|TAXABLE INCOME, PHP (US$)||TAX RATE|
|Up to 10,000 (US$213)||5%|
|10,000 – 30,000 (US$638)||10% on band over US$213|
|30,000 – 70,000 (US$1,489)||15% on band over US$638|
|70,000 – 140,000 (US$2,979)||20% on band over US$1,489|
|140,000 – 250,000 (US$5,319)||25% on band over US$2,979|
|250,000 – 500,000 (US$10,870)||30% on band over US$5,319|
|Over 500,000 (US$10,638)||32% on all income over US$10,638|
|Source: Global Property Guide|
Depreciation costs can be set against income for the purpose of income tax. Approved methods are the straight-line, the declining balance, sum of years-digits, unit of production method, the operating day method, and any other method as prescribed by the Secretary of Finance.
Nonresident foreigners who are NOT engaged in trade or business in the Philippines: gross income is taxed at 25%. No deductions or allowances are available to nonresident foreigners who are not engaged in trade or business in the country.
Taxable income is computed by deducting income-generating expenses and personal allowances from gross income. Nonresident foreigners are not allowed to elect a standard deduction. Typical deductions are repairs and maintenance, depreciation, and taxes and licenses, which include local business tax, mayor’s permit and real property tax. The amount of deductible expenses can range from 40% to 90% of gross rental income.
A business permit is required before renting out property.
Under existing regulations, a 12% Value Added Tax (VAT) is imposed on residential property leases that satisfy certain conditions. The VAT burden is generally shouldered by the tenants.
Properties with rental payments exceeding PHP12,800 (US$272) per month received by landlords whose gross annual rental income exceed PHP1,919,500 (US$40,840) are subject to 12% VAT.
Properties with rental payments exceeding PHP12,800 (US$272) per month received by landlords whose gross annual rental income is less than PHP1,919,500 (US$40,840), are not subject to VAT. Instead, it will be liable for percentage tax at a flat rate of 3% levied on the gross rent.
Properties with rental payments below PHP12,800 (US$272) per month are exempt from VAT.
It is necessary to classify the property as either ordinary asset or capital asset to determine the treatment of its capital gains taxation.
Ordinary assets are properties that are used in trade or business, such as a rental property. Capital gains realized from the sale of real property treated as ordinary assets are included in the aggregate income and taxed at progressive rates. Taxable capital gains are computed by deducting acquisition costs and incidental expenses from the gross selling price or fair market value of the property.
Properties considered as ordinary assets are not liable to pay the Capital Gains Tax, which is really a transaction tax (see “Costs of Buying Property”).
Capital assets are properties that are not used in trade or business.
The Philippines has a tax called Capital Gains Tax but it is really a transaction tax on selling or transferring real estate properties classified as capital assets. This tax is not an actual tax on the gains incurred on the sale of the property. The capital gains tax is levied at a flat rate of 6% on the property’s gross selling price or market value (see “Costs of Buying Property”).
Real estate tax is levied on Philippine real property and the applicable rate varies depending on the location. The maximum rate for cities and municipalities within Metro Manila is 1%, while the maximum rate for cities and municipalities outside Metro Manila is 2%.The owner has the option to pay the tax in four equal installments on or before the last day of each calendar quarter.
Calculating the Property’s Assessed Value
The tax is levied on the property’s assessed value (which is a prescribed percentage of current fair market value depending on actual use and zoning of property). In computing for the taxable value, the property’s fair market value is determined and the assessment percentage is then applied. The resulting amount is the tax base where the real estate tax rate is applied.
ASSESSMENT LEVELS ON BUILDINGS
|FAIR MARKET VALUE, PHP (US$)|
|Up to 175,000 (US$3,723)|
|175,000 - 300,000 (US$6,383)|
|300,000 - 500,000 (US$10,638)|
|500,000 - 750,000 (US$15,958)|
|750,000 - 1 million (US$21,276)|
|1 million - 2 million (US$42,553)|
|2 million - 5 million (US$106,383)|
|5 million - 10 million (US$212,766)|
|Over 10 million (US$212,766)|
ASSESSMENT LEVELS ON LAND
|Source: Global Property Guide|
Property owners are required to file a sworn statement declaring the true (current and fair market value) of their property once every three years. The filing period is from 01 January to 30 June annually.
The local government where the property is located may collect special education fund (SEF) at a flat rate of 1%, which is levied on the property´s assessed value. This tax is levied annually.
Income and capital gains earned by companies are taxed at a flat rate of 30%. Income-generating expenses are deductible when calculating taxable income.
A 10% surtax is imposed on improperly accumulated earnings.
#1 PORTER SMITH | April 03, 2010
In 2006 my wife and I purchased one house and lot for 1,200,000 and another house and lot for 610,000. These properties are both located in the Eastwood Greenview Project in Montalban, Rodrigues, Rizal. We have not received any property tax bills and have no idea if we owe taxes or if the tax is included in the monthly subdivision dues we pay each month. How do we find out or who do we contact to determine our tax situation?
#2 RYAN | May 09, 2010
We got a house and lot at a subdivision in cavite. we are still on our 12 month paying the equity when we are advised to pay for real property tax already. Is it legal for the real estate owner/developer to collect real property tax charges when the lot has not been transferred to our name yet.
The real estate/developer is collecting the real property tax.
please advise if this is valid.
#3 PAT | June 13, 2010
Similiar to question asked by Porter Smith (#3). Where do the answers to questions get posted? My wife and I also purchased a house in San Jose, Rodriguez, Rizal and have not received any tax bills and do not know where, how or who to contact to find out if taxes are due and who to pay them to.
#4 JASMIN B. CANUEL | June 28, 2010
"Property owners are required to file a sworn statement declaring the true (current and fair market value) of their property once every three years. The filing period is from 01 January to 30 June annually."
Where will I file ?? who will help me assess my current and fair market value?
#5 THERESE | July 08, 2010
@porter smith and pat- once you have the title to the property you should present this to to the local(municipal or city)assessor and he/she will issue a tax declaration in your name which makes you liable to the annual real property tax. very few local govts. send tax bills so you have to go to the assessor to get your tax assessments which you will present to the municipal treasurer to pay for the tax.
#6 MARGIE | July 18, 2010
I have a certified copy of a Title that my sister sold the land in K-1st Kamuning for 2.6 on 5/28/2008. How do I get a copy of the settlement costs? The contract to sell indicated that she was receiving payments in installment basis from 12/2007 to May, 2009. FYI, our parents died yet my younger sister sold the land without a waiver from 9 other surviving children. My mother has a pending probate case finalizing on 8/5/2010. She did not include the sale of the land on the final accounting of the probate. Also, she stated that she paid $4925 for property tax. how do I get a copy of the payment on property tax?
#7 MYLES | September 15, 2012
Under existing VAT regulations, rental payments exceeding PHP10,000 (US$237) per unit received by landlords whose gross annual rental income exceed PHP1,500,000 (US$35,528) are subject to 12% VAT. If the gross annual rental income is less than PHP1,500,000 (US$35,528), the applicable tax rate is 3%. The VAT burden is generally shouldered by the tenants.
can you explain this ? lets say our gross annual income is Php60,000 for apartment rental the percentage that we need to pay for tax is 3% ? and whta do you mean on the last part of it which is VAT is shouldered by the tenant? what do you mean ? please answer ,
#8 LEEJAY GONZALES | September 17, 2012
Hi! I am licensed broker and I just saw all the comments. To start off, annual Philippine Property Taxes (1% of the assessed value within Urban Areas / 2% for Suburban areas) are levied to all registered owners of properties. If you buy a pre-selling / off-the-plan property, it should be the developer who has to pay the annual property taxes till TCT/CCT is already transfered to the buyer. Nonetheless it is a business, and normally annual taxes are utomatically imputed and considered in the list price of the unit till its target turnover. "Other Charges" portion of the developers usually include the documentary stamps, Transfer Fees and Taxes, insurance policies). Once an individual / buyer already holds the original TCT (Land) / CCT (condominium) from a developer, then the burden of paying property taxes are succeeded by the owner. Imperatively, it is advisable to settle your forth coming property taxes for the succeedng year every December of the ending calendar year. Advance full payments are usually given discounts by the BIR. In posh property developments, like for most Ayala Land properties, paying property taxes are as easy as issuing a check to your building / village property manager. Then, they will be the one who'll go to your municipal / city hall's assessors office to inquire the amount and pay the property taxes, on your behalf. When you already have the TCT / CCT, just go to the Municipal / City Hall Office where your property is located, go to the assessors office to inquire and ask for your tax declarations and likewise where you will your property taxes.
#9 MONE | October 17, 2012
Hi, My mother just sold her property in Manila, we live in California USA. All my mom children (all adults) lives in California, I understand she needs all the children birth certificate etc... Do you know what documents we need to make the transfer or any reputatable attorney in Philippines hopefully in Manila or here in California Bay Area. Who might be able to help us. We are planning to go the Philippines by end of October. Please advice
#10 LEI MANALO | October 26, 2012
Please give me an advice.. My friend is owning a 500sq.meter lot in the Philippines With a bulilding,its a disco house before.She want to sell it now but her problem is she didn't declared the building to the municipal almost 15 years from now.what will she do... Is there a penalty about undeclared building? How much it will be?she don't have a problem about tax .please help what should we do about this undeclared building for 15 years ...thank you...
#11 AYALA BACOLOD PROPERTY SPECIALIST | October 31, 2012
Hi, I'm Eugene, a real estate broker. If your problem is the unsettled tax for your real estate property lot plus Building or Improvements. You could pay the property plus penalty, Philippine Property Taxes is 1% of the assessed value within Urban Areas and 2% for Suburban areas are levied to all registered owners of properties.
I have a client from manila and ask me to sell his (1160 sqm lot w/ improvement) property in Bacolod city, In order to assess the property in its Market value or in its sellable price. We obtain its levied tax for 15 years plus penalty it only amounted to P230,000 thousand including penalty. But our appraised value for the property is 21 Million its just a small amount in 15 years.
#12 ANDREW LOCKE | March 09, 2013
My advise to anyone looking to invest in property in the Philippines is to run a mile. If you have a house and lot property that is worth more than 2.9 million then you will have to pay 12% VAT and 6% capital gains tax on the sale plus 1 - 2% real estate tax per annum. Even if you are a cash buyer you will have to experience 4% growth per year and hold the property for five years to recoup just your initial investment and this does not consider inflation on the initial investment value. My advice is, unless you want to stay in the same house for may years to come, just rent.
#13 TANYA | June 17, 2013
Thank you, Andrew
Today is day I should really transfer my money to reserve the condo at 6~7 mill in Markati. But I was just aware of the hefty tax last Friday and my friend who cover Pilipino clients (private wealth) just explained to me how his clients don't think it's a good idea. So i'd really appreciate your input.
I am not sure if this website allows users to do so..Is possible, can I contact you directly?
#14 MARLA AGUASIN | September 25, 2013
Hi Tanya! why did they think its not a good idea? I think it will depend on the property, if its something you can handle and how feasible it is to generate the amount of wealth you'd like in the long run. Tax is part of life hehe. It depends on your risk appetite as well. The Filipino clients (private wealth) may have excess cash to spare giving them a bigger appetite to invest let's say in a tax efficient investment but maybe very risky (you can lose your money in a day). Investing in real estate (and should be with a very trusted developer) is a sound choice if you'll like to see something tangible with passive returns.
If you are looking to invest this year in the PHIL in real estate and are looking for guaranteed income, growth and capital appreciation, I would recommend condo-hotel projects. The Philippines has an increasing tourism industry and hotels are needed to meet the demand of short-stay clientele in top tourist destinations of the country mainly Manila, Tagaytay & Mactan Cebu. Its a long-term hassle free, less risky investment with additional perks to enjoy when you visit the country :)
Do not miss out in the PHIL's booming economy :)
#15 LYN CRUZ | May 20, 2014
Me and my 2 siblings inherited a 180 sqm lot from our parents. We had the lot subdivided equally and titled to each sibling. We pooled our money and hired a contractor to build our individual house in the lot. What is the basis of the fair market value of the improvement (house), would it be the total value of the the three houses, or the proportional value of each house (i.e., total value divided 3)?
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