Uh oh, you owe

(This is a hypothetical story based on existing laws.)

Once upon a time, an individual wanted to rent their old house, which was now located along a highly commercialized street. He thought the tenant would be a business and likely need an official receipt, so he registered himself as a lessor with the BIR.

Not long after, he leased the property to a restaurant operator. The lease lasted for years.

One day, he decided to cash out and sell the property to the tenant. He thought selling the property for Php100 Mn was more than enough for his retirement.

During the negotiations, he discovered that the sale would be subjected to VAT. No problem, he wondered; he'll increase the price by 12% to cover it. The tenant agreed to the 12% increase and closed the deal for a total price of Php112 Mn (VAT-inclusive).

The tenant's broker handled the transfer of title while the owner paid for the VAT. Deal done.

The owner lived his remaining years happily ever after...or did he?

Now for the horror story.

Most people need to learn that the sale of ordinary assets (i.e., properties used for business) is subject to income tax. The creditable withholding tax paid is merely a portion of the income tax due.

This is a surprise for most because its payment is not a pre-requisite for the transfer of title. Nonpayment of income tax is subject to a 25% surcharge, 12% interest each year (20% pre-TRAIN), and a compromise penalty. You'll only get the (total) bill if you file an "open case report", the BIR assesses your TIN, or once your estate is being settled.

How much is the income tax?

Approximately 35% of the selling price of the property, less the creditable withholding tax paid by the buyer for the title transfer. Of course, IF the owner booked the asset correctly in his books, he could claim the "cost" of the property as a deductible to the taxable income. But assuming he didn't, the sale is still subject to roughly Php29 Mn income tax.

Lessons:

1. Never register yourself as a person engaged in RE business with the BIR. You're better off setting up a company.

2. Hire a licensed accountant who can guide you through these hurdles.