Transaction Costs and Tax Dues to Government

[Basic Knowledge for Brokers]

Below are the transaction cost and tax expenses that should be considered in buying, selling, or brokering real estate.

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NOTARIZATION OF DEED

This one-time expense is payable to the Notary Public Attorney for every piece of Deed or Contract. A document that needs notarization could be the following: (1) Deed of Sale, (2) Deed of Donation, (3) Mortgage Agreement, (4) Contract to Sell, (5) Lease Contract, (6) Extrajudicial Settlement, (7) Listing Contract, (8) Joint Venture Agreement, etc. etc.

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REAL PROPERTY TAX

This declared annually and paid annual to the City Hall/Municipal/Town Hall. Local Government Units have varied Real Estate Tax rates. In the City of Manila, the tax rate is 2% (0.02) of the assessed value of property. The Assessed Value varies from one LGU to another, but it is usually around 20% of the current market value of the property. For estimation purpose only, it is around .4% (0.004) of the Total Contract Price of the property based on the deed of sale.

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FIRE TAX

This annual tax is payable to the City Hall/Municipal/Town Hall by the existing property owner or existing property occupant. Local Government Units have varied Fire Tax rates. In the City of Manila, the tax rate is .01% (0.0001) of the assessed value of property. The Assessed Value varies from one LGU to another, but it is usually around 20% of the current market value of the property. For estimation purpose only, it is around .002% (0.00002) of the Total Contract Price of the property based on the deed of sale.

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CAPITAL GAINS TAX

This one-time tax is payable to Bureau of Internal Revenue (BIR) by the property seller. The CGT is 6% of the Final Price that can be found in the Deed of Sale. Capital Gains Tax can also be estimated before the sale is consummated by using the zonal value; for estimation purpose, it is around 7.5% (0.075) of the Zonal Value.

The transaction is exempt from CGT if the property being sold is a principal address; provided that the following conditions are met: (1) the sale or disposition is a principal address of the seller, (2) the seller is a natural person, (3) proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the dale of sale or disposition, (4) the historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired, (5) the BIR Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition, (6) the said tax exemption can only be availed of once every ten (10) years, (7) execution of Escrow Agreement. If there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax.


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TRANSFER TAX

This one-time tax is payable to the LGU to transfer the ownership of the property from one party to another. The rate is about .75% (0.0075) of the Total Contract Price of the property sold based on the deed of sale.

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DOCUMENTARY STAMP TAX

This one-time tax is payable to Bureau of Internal Revenue (BIR). The rate is about 1.5% (0.015) of the Total Contract Price of the property sold based on the deed of sale. Tax Code Section 196 -- Deed of Sale, instrument or writing and Conveyances of Real Property (except grants, patents or original certificate of the government). The Tax Rate is PhP15 for the First 1,000 and PhP15 for each additional P1,000 or fractional part thereof in excess of P1,000; Otherwise the Tax Rate is 1.5% of the consideration or Fair Market Value, whichever is higher (if government is a party, basis shall be the consideration). Documentary Stamp Tax is a tax on documents, instruments, loan agreements and papers evidencing the acceptance, assignment, sale or transfer of an obligation, right or property incident thereto.

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PAPERWORK ERRAND

Most real estate service companies have external Support Errands on contractual basis. The service contract rate is usually not lower than P500 a each day the Errand goes out to transact the paperwork and payment to City Hall, BIR, and Registry of Deeds.

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PROFESSIONAL FEE

This one-time professional fee is payable to the licensed Real Estate Broker who does due-diligence on the Property Folder which contains the title documents of the property and the ID documents of the seller/lessor prior to offering it in the market. It is supposed to be one-time fee because brokers are expected to be technically proficient in adjudicating a due-diligence workload and property folder preparation workload in one sitting. The fee varies from one broker to another, it also depends on the difficulty of the workload, and much more on the reputation of expertise of the the broker. Another major factor that affects this is the extent of advertising the seller wants. Seasoned brokers can give a quick quotation of a professional fee during interview with client.

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BROKER'S COMMISSION

This one-time fee is payable to the Licensed Real Estate Broker. The rates vary but it is usually not higher than 5% (0.05) of the Total Contract Price based on the deed of sale. In case of a lease contract, it is normally one month rent if the lease period is at least one year. In case of Property Management, the client pays the broker equivalent to one month rent for every year of service. Some brokers, though, accept staggered payments of commission spread monthly throughout the length of the lease period or length of the property management period.