THE PRICE OF A HAPPY ENDING

Once upon a time, a man owned an old house that now sat along a bustling, highly commercialized street. Wanting to earn from it, he figured he’d rent it out. Since his future tenant was likely a business that would need official receipts, he registered himself as a lessor with the BIR.

Before long, he leased the property to a restaurant operator. The lease ran smoothly for several years.

Eventually, he decided it was time to cash out. The tenant was interested in buying the property. The man thought that selling it for P100 Mn would be more than enough to fund his retirement.

But during the negotiations, he learned that the sale would be subject to VAT. No problem, he thought. He’d just add 12% to the price. The tenant agreed, and they closed the deal at Php112 million, VAT inclusive.

The tenant’s broker took care of transferring the title, and the seller promptly paid the VAT.

And just like that, the deal was done. The man rode off into the sunset, ready to enjoy the rest of his life in comfort...

...or so he thought.

Now, the horror story.

What many don’t realize is this: when you sell a property used for business, it's considered an ordinary asset—and the sale is subject to income tax.

Most are surprised because paying income tax isn't a requirement for transferring the title. As a result, it often gets overlooked. If you fail to pay, you're hit with a 25% surcharge and 12% annual interest (previously 20% before the TRAIN Law).

You might only find out when you file for an “open case report,” when the BIR checks your TIN, or—worst of all—when your estate is being settled after you pass away.

So, how much is the income tax?

Roughly 35% of the selling price, less the creditable withholding tax paid during the title transfer. If the property was properly recorded in the seller’s books, he could deduct its original cost to reduce the taxable gain. But let’s assume it wasn’t. That’s a whopping P29 Mn in unpaid income tax—plus penalties and interest.

Lessons:

NEVER register yourself as a person engaged in real estate. It’s smarter to set up a corporation instead.

Always hire a licensed accountant to help you navigate these complex tax rules.