SELLING PROPERTY? THE VAT FORM IS LYING TO YOU

Selling property below zonal value? Your VAT might be higher than you think.

First, a quick reminder on when VAT even applies. Not every property sale is subject to VAT. If you're selling a personal residential property that isn't part of a business, VAT generally doesn't apply. But if you're selling a commercial property, a unit you rent out, or any real estate held for sale or lease in the ordinary course of business, VAT comes into play. That's when the next part matters.

Now, most sellers already know: if you sell real estate below its BIR zonal value, withholding tax gets computed on the zonal value, not your actual selling price.

But VAT? That's where people get tripped up.

Quick example:

Selling price: Php 10 Mn

Zonal value: Php 11 Mn

Which one is VAT based on?

The common assumption: use the selling price since that's what actually got paid, and that's what the VAT return form calculates from anyway. If you put Php 11 Mn as the selling price in the VAT return form, it's tantamount to saying you collected Php 11 Mn from the buyer, which is completely false.

Unknown to many, there's a specific Revenue Regulation that tackles this. BIR Revenue Regulation No. 4-2007 states that for real property, VAT is based on WHICHEVER IS HIGHER: your selling price or the zonal value.

So in this example:

Php 11 Mn x 12% = Php 1,320,000 VAT

NOT Php 10 Mn x 12% = Php 1,200,000

That's a Php 120,000 gap the BIR expects you to catch yourself. The form won't flag it for you.

So how do you actually file this when the standard VAT form doesn't have a field for zonal value, it just multiplies whatever selling price you type in? In practice, you can't simply enter Php 11 Mn when your deed of sale shows Php 10 Mn. You'll need to go to the BIR, explain the basis to the examiner, and go through manual filing instead of relying on the automated form.

Takeaway for sellers, brokers, and buyers: before computing VAT on a property sale, always compare the price to the zonal value. Higher one wins.

Save this for your next transaction.