Allow me to reply to questions from our readers this Sunday.
Q. I am a Filipino residing in the US and I own some real properties in the Philippines. I want my only sister living in the Philippines to eventually inherit these properties from me. What is the best way to transfer the property so that it is not eaten up by tax?
A. One of the good things that is included in the tax reform bill in Congress, and which is still there even in the latest draft, is the lowering of estate tax to six percent from the current 20 percent. This is now about the same tax that applies to sale of property not used in business, which is also subject to capital gains tax of six percent. The bill is expected to become a law this year, to take effect in 2018.
So one of the obvious estate tax planning steps is to simply be healthy while waiting for the bill to be passed soon.
In fact, after that bill is passed, you can also choose to donate the property immediately even if you are still strong and healthy because donor’s tax is going down to six percent as well (from a high of 15 percent on donation to family members).
Q. We bought a condominium unit in Makati two years ago because condominium living seems so comfortable for aging couples. We are now selling the house we are living in to transfer to our unit soon. You wrote about capital gains tax exemption in one of your articles. Is the sale of our residential house exempt from tax?
A. Indeed, there is exemption from capital gains tax on sale of residential property but for this exemption to apply, timing is critical. The law says that you need to use the proceeds from the sale of your residential property to buy a new house within 18 months from the time you sold your old house.
If you paid for your condominium unit in cash, you will not get the capital gains tax exemption because that transaction happened before you sold your house. However, if it is purchased on installment, or via financing, that portion equal to your unpaid loan or installment can still be exempted because you can show that to that extent, you used the proceeds to buy a new house. Note that the capital gains tax supposed to be paid should be placed in escrow and released only after you purchase or pay off your new acquisition because the BIR wants to see that you really used the proceeds to buy your new home.
Q. I bought a residential lot in the subdivision where I live, for investment purposes. I want to put up a house or an apartment row there for rent but not in the near future. Our Mayor is imposing tax on idle land and I was advised to put a fence around my property and to construct even just a lavatory, which means it must have water connection. Can the Mayor do that?
A. The mayor has the power under the law to impose tax on idle land. Owners of idle property are penalized under the law to encourage productive use of the property so that it can contribute to national development.
To avoid this penalty, improvements must be introduced to the property. This is defined in the law as a “valuable addition” to “enhance (the) value, beauty or utility” of the property.
Thus, you do not necessarily need to put an actual fence and construct a lavatory on the property, which can be considered as superficial or “mere superimpositions.” The Urban Development and Housing Act of 1992 in fact states that trees, plants and crops can be considered as improvements.
So if you plant vegetables, fruit-bearing trees, or even ornamental plants, that can increase the value of the property or add beauty to the environment, your property should not be penalized then as idle.
Q. We donated Gawad Kalinga (GK) villages and found out that in one village that we donated, the beneficiaries are not living there. At best, they only go there in the weekend as they want to be near their workplace during the week. We are concerned they might want to sell the property or lease it out as they are the owners anyway.
A. The grant of GK properties is what you may call donation subject to conditions. And those conditions include prohibition against selling the property or leasing it out. Obviously, these conditions are important because otherwise, the syndicates will be in full force and will try to make money out of people’s good faith and generosity. If this is somehow being done surreptitiously, the beneficiaries can be stripped off their ownership of the donated property. They can, however, transfer the property via succession to their heirs. Hopefully, their lives would improve before that kind of transfer and they can give the house donated to them in the past to the next one in need.
Alexander B. Cabrera is the chairman and senior partner of Isla Lipana & Co./PwC Philippines. He also chairs the Tax Committee of the Management Association of the Philippines (MAP). Email your comments and questions to aseasyasABC@ph.pwc.com. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.