Worst-Advice Ever

Once upon a time, a couple owned a house in a posh village and a high-end condo.

They were in that stage where they simply wished to see the world. So, they decided to lease out their house and stay in their condo. They got their trusted broker friend to look for a tenant.

Their friend showed their house multiple times until one day, they got an offer. The prospective tenant was a top executive of a multinational company. Since the company wanted to declare the rent as an expense, they required an official receipt for the rent.

So, the broker advised the couple to register themselves as real estate lessors so they could issue official receipts. And after a month or two, the lease commenced.

A decade passed. The lease ended. And they sold that house they rented out. The same broker-friend sold the house for them.

One day, the couple decided to migrate to another country and sell their condo. They used a different broker this time (Broker 2). It was not long until Broker 2 found a buyer. Broker 2 conducted due diligence in preparation for the sale and discovered that the couple were registered lessors. As such, Broker 2 advised the sellers that the deal would be subjected to VAT and income tax.

The couple couldn't believe what they were told, mainly since they sold their house without paying VAT. They looked down on Broker 2 and thought he didn't know what he was talking about...

According to Broker 2, they risked paying over Php70 Mn in taxes.

I'll end the story here.

So, who's correct?

+ Broker 2. The clauses of BIR RR 7-2003 may be interpreted to include ALL properties of the owner–even personal ones.

Why wasn't the house sale subjected to VAT?

+I don't know (but I have some ideas). If a motorcycle rider wasn't flagged for being in the bus lane the first time, it doesn't mean he wouldn't be flagged the next time.

Are there other ways to avoid this predicament?

+ Yes, there are several LEGAL ways the couple could have done everything. And no it’s not tax evasion. But of course, doing it the proper way would entail additional costs.

The key point is this: NEVER REGISTER YOURSELF AS SOMEONE ENGAGED IN RE BUSINESS. You're better off setting up a company for this.