Real Estate Limbo

Once upon a time, a successful businessman purchased parcels of land in various areas. It was the 1920s, and land then was extremely cheap. He was a visionary and thought that real estate was a promising investment, something that he could pass on to his nine kids.

Today, the properties are now located in busy business districts. Some of the businessman's heirs thought of selling some of these parcels. The problem, however, is that their sale would require over 90+ signatures after their ownership was passed on to several generations of heirs. They weren't sure how many signatories there were precisely since they couldn't trace some of them. To make matters worse, a number of these signatories were now living abroad.

So, who does the job of going after each signatory? Who shall front the cash to settle the estates of those heirs who have passed? Would any buyer be courageous enough to purchase these properties, knowing that it only takes one disgruntled heir to question the sale and cause problems later on?

Discussion

1. Surprisingly, lots of prime properties in the country share the same problem of hereditary succession. This is apparently why the government's estate tax amnesty isn't as successful (?) as it should be.

A bigger problem that haunts these assets (more than the money required to settle estates) is having to trace each and every heir for their signature. Some property owners have even resorted to forging signatures of some heirs to simplify the process.

Unless the government does something (e.g., amend/make a special exception), these assets will forever be stuck in limbo.

2. One solution most property owners do to address this problem is to lodge assets into companies. By doing this, the sale of these assets would merely require a board approval/shareholder vote and determining what the majority wants. In the post, if one of the 90 heirs says no to its sale, then the sale wouldn't push through.

However, lodging properties in companies introduces another set of problems–higher taxes. Ever since 2010, the BIR has strictly enforced subjecting such property sales to 12% VAT and ~30% income tax. Moreover, releasing funds to shareholders would subject such funds to a 10% dividend tax.

(Note: There is a specific way to lodge a RE asset into a company and not be considered as an ordinary asset. The proof of this is if you check BIR Form 1706 for Capital Gains Tax (January 2018 version), question 3 allows the reader to choose "WC 450-Corporation".)

Most property owners who incorporate companies for such purposes fail to properly maintain the company–likely because of the additional costs these entail (e.g., keeping lawyers/accountants on retainer for the whole existence of the corporation). As such, many of these companies have become dormant, which then makes the sale of assets also problematic.

3. Solution 2: Owners could also divide his properties amongst his kids through donation before his death. This option used to be less popular because of the hefty donor's tax involved (previously max of 15%). But ever since the donor's tax was revised to 6% (similar to the estate tax), this could be a more viable solution.

The only problem with this solution is, what if the owner doesn't have enough properties to split among his children?

4. There's another way to solve this problem: lodge the property under a trust. But I'll save this option for another post.