MattP73

Hi all...I have a question regarding capital gains tax in the Philippines.
My Filipino wife and I have built a house in the Philippines. We are now in a position where we may want to sell due to change of circumstances. The capital gains tax is a rather a bitter pill to swallow at 6% of the total sale and can’t really understand the reasoning if the property is your sole residence, as in the U.K. you do not pay tax on a property sale if you live in it.
If I understand correctly the capital gains tax does not apply if the house or building is used for commercial purposes which includes rental and classed as an ordinary asset hence not requiring capital gain tax upon sale. See rule below from BIR website.

In the case of taxpayer not engaged in the real estate business, real properties, whether land, building, or other improvements, which are used or being used or have been previously used in trade or business of the taxpayer shall be considered as ordinary assets. [Sec. 3(b) of RR No. 7-2003]

At present we are not living in the property and back in the U.K. but have a family member living there paying a small monthly rent. If this is the case could we class the property as a rental and if we sold it as such could we avoid the tax?

I hope I’ve made my thoughts understood.
If you have any other suggestions or work around to minimise tax I’m all ears.

Raffin

What I can remember about the sale of a property my wife owned some years ago was that a much lower sale price than the actual was submitted.

mikek1

We sold a House and Raffin is correct the value of the House is submitted at a far lower value thus reducing the transfer tax. The amount of reducrion can be substantial.

mikemike

The BIR have been tightening up on the low base price of property being sold, it used to be valued at city hall figures for annual property tax valuations....nothing is ever simple here. The previous BIR commissioner tried to drop a stink bomb on this as her parting gift, I am not sure how this has worked out. No harm in sending an email to the local BIR and asking

Equally the tax has to be paid up front and is not a net deduction expense against house proceeds.

If you have let a property out and do not wish to pay CGT, the local BIR may wish to see the monthly 5% sales rental tax and Evat to confirm being CGT exempt, They will want their ounce of flesh one way or another.

MattP73

5% of a small rent is better than 6% of millions...
Am I correct in my thinking though? If renting out and if we paid the small amount of tax and pretty sure we have to register a business name at town and burangay hall as well as BIR the property then becomes a business..therefore no tax at sale.
could the new owner purchase and live there without issues?

Gazza-d

We just bought a doer upper from a local couple, unlitled at present, it was handled at barangay level so no taxes. Mind you we only paid p150k.

mikemike

the small rent tends to go with a small price purchase. It is NOT just 5% it s 5 % plus EVAT
Additionaly it may also encourage the BIR to investigate how many other properties are owned and being rented without upfront tax deductions. Better 6% CGT than huge penalties being applied that will more than cover the 6% CGT.

As Suggested it may be best to approach the BIR and just ask. There is a suggestion that the first rented property may be exempt from Evat and sales tax if the rented figure does not exceed 15,000p pm Once again best get verification on ALL such issues from the BIR. I have found them to be very helpful when visiting their offices.

MattP73

we only have the one property and we pay all required taxes annually and it has been valued for a market value by the local government. It is only rented out for a small amount each month as already said. My point is...if we are renting it out could be technically claim it as a business and therefore sell as a business/commercial property with no capital gains. If I understand correctly completely legal. We have no issue with BIR looking for anything as all taxes have been fully paid to whoever requires them.

mikemike

Ask the BIR

Stokkevn

If you go to BIR get them to sign what they are telling you or take a friend and record what they tell you. Not unknown that when you go back to them all the rules have changed.

MattP73

I’m asking here because as I said in my first post I’m in the U.K. and not the Philippines otherwise I would go to BIR.
I would like to find out if anyone has experience with this or has done anything similar.

mikemike

Then write to them and ask that way. Stok just pointed out you will get a written response. I have written to them on more than one occasion and received very comprehensive answers.

Then again you may wish to wait for an unknown person tell you what you want to hear, up to you

Raffin

You're not here, you are a foreigner and will be relying on others to process this. Seems they're not experienced either. Risk of opening up a can of worms.Offer the property under the condition that the buyer, preferably a local, deals with the CGT, My wife did just that with a provincial property 4 years ago.

Anyway, your idea on claiming you have a rental business seems unlikely to work. You're not charging a market rent. The BIR will see it as just a caretaking arrangement.