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);
(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);
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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. —
(B)Exempt transactions. —
(1)Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from VAT:
(p)The following sales of real properties are exempt from VAT, namely:
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.