4 Things you Need to Know about Capital Gains Tax before Buying a New Property

Have you been thinking of buying your first-ever home? Whether you are scouting for a new house for your growing family or seeking a new place and environment where you can have a sense of security and peace of mind, one of the things which you need to be aware of is the capital gains tax of the property involved. But what exactly is capital gains tax, and what are the other things you need to know about it before making the jump at finally deciding to buy a property? Let's find out!

What is Capital Gains Tax?

The Bureau of Internal Revenue (BIR) defines capital gains tax as the "tax imposed on the gains that are presumed to have been realized by the seller from selling, exchanging, and disposing of his/her capital assets in the Philippines, including pacto de retro sales and other forms of conditional sale."

Sounds heavy? In a much simpler term, it is the tax imposed once profit is earned from selling an investment – be it in the form of stocks, bonds, jewelry, coin, collections, and real estate. Specific to real estate, a seller is required to pay the tax after the property, which is classified as a capital asset, is sold.

The capital gains from selling real estate are considered long-term capital gains. Unlike short-term capital gains, these types of properties are typically owned for more than a year before having them sold.

Who should file and pay the Capital Gains Tax?

Since the tax is imposed on the gains from selling the property, it is the seller’s responsibility to file and pay capital gains tax. The seller must file the Capital Gains Tax Return (BIR Form No. 1706) in triplicate copies and settle the tax within thirty (30) days after the Deed of Absolute Sale of the property sold is notarized.

Here is the detailed step-by-step guide to the whole process:

1.     Go to the Revenue District Office (RDO) that has jurisdiction over the property. Present the documentary requirements and request the computation for capital gains tax.

2.     Go to BIR’s authorized agent bank (AAB) and request the prescribed deposit slip. Present the accomplished deposit slip, along with the filled-out BIR Form No. 1706 and proceed to pay the tax.

Payment of Php20,000 or below shall be paid in cash, while an amount higher than Php20,000 shall be made through a manager's check or a cashier's check.

For areas without an AAB, the return will be filed to the revenue collection officer or authorized city or municipal treasurer. Payment could also be made using the electronic filing and payment facilities of BIR.

3.     After paying the tax, return to the RDO and file the BIR Form No. 1706, including the requirements.

While the seller is primarily responsible for filing and paying the tax, there are some cases where it is shouldered by the buyer or a real estate broker.

How much should I pay for Capital Gains Tax?

According to the National Internal Revenue Code of 1997, Section 24 (D), the gains from selling a real estate property are subject to a capital gains tax rate of 6%, multiplied by either the gross selling price in the zonal value or the Deed of Sale or current market value – whichever is higher.

Suppose that a 400 sqm residential lot in Cavite is sold for Php5,000,000, but the prevailing market value based on the assessor’s valuation is Php4,500,000. To compute the capital gains tax rate, you must use the higher value of the property as the tax base – Php5,000,000 in this case – and multiply it by 6%. Therefore, the total capital gains tax to be paid is Php300,000.

HOW ARE CAPITAL GAINS TAX RATES CALCULATED?

Capital gains tax rates = Property value/current fair market value (whichever is higher) x 6%

It is important to note that the BIR’s regulations for tax rates only apply to the properties located in the Philippines. You can read more about this type of tax under the National Internal Revenue Code of the BIR using this link. 

Is it possible for a property to be tax-exempt?

The quick answer is yes! But tax exemption is only possible under two main conditions. First, the property should be the principal residence of the seller. A principal residence is a house and lot where the seller and/or members of his/her family permanently reside.

Whether the seller is studying or working abroad or has been away from home for a while, it will still be considered a principal residence so long as the address registered under his/her income tax return or ITR is the address of the property being sold.

Second, it must be ensured that the proceeds from selling the property are used to acquire or construct a new principal residence within eighteen (18) calendar months from the date of sale, exchange, or disposition of the property.

To qualify for the exemption, the filing party must check items 16 and 17 in the BIR Form No. 1706. Other means to verify a principal residence is through a Certification of Barangay Chairman (for house and lot) or a Certification of Building Administrator (for condominium unit).

Other conditions for taxable capital gain exemptions are stated in BIR Revenue Regulations No. 13-99, which was later on amended by Revenue Regulations 14-2000.

It is important to think of capital gains taxes whenever you sell an asset. But for buyers who want a hassle-free acquisition, fortunately, there is an option to buy an affordable house and lot without the added worries! Lumina Homes is your perfect partner when it comes to finding a home that will fit your and your family's needs.

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