Real Estate 101: What is Inheritance Tax and Estate Tax? What’s the Difference?
There’s an old saying that’s been used countless times in movies and TV. The line goes something like, “There are two things you cannot escape in life: Death and Taxes”. In some countries, this is even referred to (colloquially) as “Death Taxes”. Definitely dark humor, but in reality, it has a ring of truth to it.
A large number of people work very hard to secure a good future for their loved ones and provide for all their needs. They may also hope to leave some kind of lasting legacy when the inevitable end comes. It can take many forms such as real estate, money, personal belongings of value (e.g. family heirlooms, jewelry, paintings, cars), or various assets that can be passed on to loved ones. This is all fine and good. Until the time comes for the lawful heirs to come claim their inheritance. This is when taxes rear their ugly head (as if the passing of a loved one wasn’t hard enough).
Anyone who has inherited something from someone who passed away by way of being included in a will may be required to pay inheritance tax. But before we can proceed, we need to define first what is meant by “estate”. Someone’s estate can include property, as well as everything else of value the deceased party owned at the time of death.
Inheritance Tax vs Estate Tax
Simply put, inheritance tax is a tax imposed by the government on the beneficiary of the inheritance (i.e. The person(s) receiving the asset or estate). This is in no way tax levied on the property itself, but rather, it is a tax on the transmission (or turn-over) of the estate of the deceased to one or more heirs. One of the most common questions that arise is “who pays the inheritance tax?”. Some countries put the sole responsibility of paying the inheritance tax on the lawful heirs, while the estate tax is paid out from the estate’s funds. However, in the Philippines, they are one and the same. From this point forward, we will be using Inheritance Tax and Estate Tax interchangeably since they really mean the same thing under Philippine law.
For example, if several beneficiaries are the recipient of a particular property (let’s say an office building), inheritance or estate tax will be computed for each beneficiary. This means that each beneficiary is responsible for paying for their own tax.
The estate tax return must be filed with the Bureau of Internal Revenue (BIR) if the gross value of the estate (consisting of registered property, vehicles, shares of stock, jewelry, money, etc.) has a gross value of more than Php200,000. That being said, it may actually make more sense to distribute inheritance before the time of death (which can sometimes be tricky, because death doesn’t abide by anyone’s schedule)
Non-resident inheritance tax
If any of the heirs are non-residents (i.e. migrate to another country), they also need to file an estate tax return. If the executor of the will lives in the Philippines, the estate tax return can be filed with an authorized agent bank of the specific Revenue District Office (RDO) where the executor lives. However, in case there is no executor in the Philippines, for example if the deceased was not a Philippine resident, then the tax return should be filed under the jurisdiction of RDO No. 39 South Quezon City.
How is inheritance tax computed?
So now we delve into the computation of the inheritance tax. The inheritance tax is computed against the net value of the assets included in the estate. The net value is sometimes referred to as the “gross estate”, which refers to all property including real property, personal property, tangible property (such as bonds or shares of stock), or intangible property (such as patents, trademarks or copyrights). Also. This is computed using the Fair Market Value (FMV) at the time of death. FMV is the reasonable price at which one could sell the estate to an interested buyer.
Since we already discussed non-resident inheritance tax, let’s also consider the possibility that the deceased wasn’t living in the Philippines (a non-resident, or not a Philippine citizen) at the time of death. Only the part of the gross estate that is situated in the Philippines is considered taxable.
This tax must be settled within six (6) months from the date of death before distribution of the inheritance to the beneficiaries can proceed. Otherwise, the beneficiaries may face penalties, unless an extension is granted by the commissioner. If you could prove to the commissioner that payment by the due date would impose undue hardship on the estate or any of the heirs, the due date could be extended up to 5 years if the case is settled through courts, and up to 2 years, if handled extrajudicially. In the Philippines, a graduated tax rate determines inheritance taxes. Estates with a net value of less than Php 200,000 are exempted from paying inheritance tax while those valued at a higher amount may be required to pay a tax rate of anywhere from 5% up to 20%. In general, late payments incur a 25% initial penalty and accrue 20% annual interest on the amount. If any fraud is involved, the amount leaps to 50%.
Is there any way to reduce the amount of inheritance tax?
This is another common question asked by beneficiaries of an estate. The most common method is to apply as many deductions on the inheritance tax as possible. This will lower the FMV of the estate, which can help put the value of the estate at a lower tax tier or threshold. It is always a good idea to examine which deductions can be applied to the estate. Below is a short list (i.e. not comprehensive) of deductions that might be applicable:
||What is this?
|ELIT (Expenses, Losses, Indebtedness, and Taxes)
||Funeral expenses, other claims against the estate, judicial expenses of interstate proceedings, unpaid mortgages, claims of the deceased against insolvent individuals
|Transfers for public use
||The amount of all bequests, legacies, devises or transfers to or for the use of the Philippine Government, or any political subdivision thereof, for exclusively public purposes
||The lower number between the family home’s FMV or Php 1 million, and the family home must be certified by the barangay captain of the locality
||The amount of Php 1 million
||Expenses incurred by the deceased within a year prior to their death, which has to be supported with receipts, for a maximum deduction of Php 500,000.
Estate Tax Amnesty
One of the most recent developments regarding tax amnesty at the time of this writing is the Tax Amnesty Act signed by President Rodrigo Duterte. This provides a 2-year period for taxpayers to settle estate tax obligations through a tax relief over properties with outstanding tax estate liabilities. The Tax Amnesty Act started on June 15, 2019, and will cover the unpaid estate taxes of any decedent who passed away on or before December 31, 2017.
Those with unsettled estate taxes starting from January 2018 to date can still benefit from the Estate Tax Amnesty through the amendments made under the TRAIN Law. It states that a tax rate of 6% will be imposed on the total net estate value of the decedent.
Tax Amnesty Act – https://www.officialgazette.gov.ph/2019/02/14/republic-act-no-11213/
TRAIN Law – https://www.bir.gov.ph/index.php/train.html
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The cost of transferring a land title in the Philippines
We will be bringing you a series of articles that discuss commonly asked questions regarding real estate in general. One of the most commonly asked questions we encounter whenever we conduct trainings and orientation seminars for those interested to get into the real estate industry is “How much does it cost to transfer the land title”?
Buying property is generally considered one of the biggest steps a person can take in life, typically due to the large amount involved. But unlike other purchases that one can make, real estate is not something you can normally have by paying for in one quick transaction. Along with the property’s price are other expenses that come as part of the purchase. In this respect, the most important is perhaps the cost to transfer the land title.
For buyers or sellers, transferring the land title can prove to be a challenging experience. The paperwork involved and the fees that need to be paid can be daunting for first timers. With that said, let’s start off by discussing the fees associated with purchasing property. Let’s start off with the cost of transferring the land title. This fee needs to be paid whenever property is purchased, sold, donated or inherited. Having the land title under your name is very important as it serves as your proof of ownership of the property, regardless if you are a buyer, a donee or an heir. The absence of this document can lead to the ownership of your property being disputed. Therefore, it is imperative that you ensure the correct processing of this document. And one of the ways to ensure this is to pay all the required fees and taxes.
The following are the fees and taxes that you need to be aware of. The amount of these fees and taxes are based on how much the property cost at the time of the transaction or transfer:
- Any Unpaid Real Estate Taxes due – always check if the property you are buying has any unpaid real estate taxes particularly if you are buying property directly from the owner
- Capital Gains Tax (CGT) – this is computed as 6% of the selling price specified on the Deed of Sale or the Zonal value, whichever amount is higher
- Withholding Tax – this only applies when the seller of the property is a corporation (e.g. a land Developer)
- Transfer Tax (Local Treasurer’s Office) – this is tax imposed on the sale, barter, or any other method of transferring of the ownership or title of real property, at the maximum rate of 50% of 1 percent of a property’s worth (in the case of cities and municipalities within Metro Manila, this is 75% of 1 percent)
- Transfer Tax (BIR) – Transfer taxes may also be owed to the Bureau of Internal Revenue. If the property was donated, the Transfer Tax is in the form of Donor’s Tax. If the property was transferred via inheritance, this is in the form of estate tax.
- Documentary Stamp Tax – this is commonly set at 1.5 percent of the selling price, or the zonal value or fair market value, whichever is higher.
- Registration Fee – commonly set at 0.25 percent of the selling price, or zonal value or fair market value, whichever is higher.
- Commission of the Agent and/or Broker
- Incidental and miscellaneous expenses – typically any expense incurred in the registration process, such as notary fees, etc.
The total amount of all these fees and taxes is the cost of transferring a land title. As you can see, all these fees and taxes can quickly add up.
Now, closely related to this topic is another question often asked immediately afterwards: “Who should shoulder the Land Title Transfer expenses?”
The common practice in the Philippines is that the seller is responsible for the following:
- Capital Gains Tax
- Withholding Taxes
- Any unpaid real estate taxes that are due
- Commission of the Agent and/or Broker assisting in the completion of the transaction
The buyer on the other hand, takes care of the following:
- Documentary Stamps
- Transfer Taxes
- Registration Fees
- Incidentals and miscellaneous expenses incurred in the registration process
This arrangement is considered standard practice. But in other cases, the buyer and seller can also mutually agree on who pays for what during the negotiation period, when the Deed of Sale (a.k.a. Deed of Absolute Sale) has not been signed yet. This document shows the legal transfer of real estate property ownership and is submitted to the Registry of Deeds for filing after the buyer pays the Documentary stamps, transfer tax and registration fees for the aforementioned Land Title Transfer.
As you can see, the entire process and everything involved can prove to be very burdensome to both buyer and seller. Since most buyers are willing to pay millions to buy property, it is sometimes worth it to engage a company that specializes in land title transfers in order to take the burden away from the buyer and seller. This also ensures that the transfer is done correctly and completely.
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With the rise in cybersecurity threats and data breaches, companies have been advising people to turn on multi-factor authentication (MFA). This basically involves using more than one method of authenticating a user.
For example, a website may require you to enter your username and password, then send an SMS message to the mobile phone number you specified during registration. The code in the SMS message is randomly generated hence the term One-Time-Password (OTP). You need to enter the OTP in order for you to gain access to the website.
Likewise, mobile banking apps on your phone also implement MFA by requiring you to enter your username and password, then also send you the OTP (usually on first time access). They also normally require the use of OTP for transaction that involve payments, fund transfers, or any changes to your user account info.
Sounds like a very secure way of doing transactions right? Someone would need to steal your phone (or your SIM) in order to obtain your OTP in order to impersonate you and perform transactions in your name. This is basically a form of IDENTITY THEFT.
Scammers and crooks have always been busy trying to find ways of defeating the latest security measures. The latest wave of identity theft goes by several names. Some call it the SIM swap scam, others call it SIM splitting fraud. But whatever name you prefer to call it, here is some of the common ways the scam is committed:
- Someone claiming to be a Telco representative offers you a SIM upgrade. All you need to do is turn in your old SIM card so they can replace it with a new SIM card with upgraded features. Unless you’re actually at the Telco branch talking to the customer sales representative sitting behind the desk, do not surrender your SIM! The moment you surrender your SIM card, these crooks now have access to your OTP and can start attempting to change your user account information so they can eventually make fraudulent transactions.
- Another way this scam is performed is with the help of someone within the Telco company itself. There have been stories of Telco staff participating (either willingly or unwillingly) to illegally provide duplicate SIM cards to criminals organizations and scammers.
- Some may even go to the Telco branch and claim to be you and report your SIM card as missing and request for a replacement SIM card.
Regardless of the method, the end result can be devastating for you and your family. Your entire life savings or retirement fund can be wiped out should you fall for this scam!
To combat this kind of criminal activity and fraud, the following tips may prove to be a life-saver:
- Needless to say, ALWAYS turn on MFA on all your mobile devices
- If available on your device, use biometric (i.e. fingerprint or facial recognition) authentication
- Regularly change your password (every 90 days is a good interval)
- Always use long complex passwords that only you can remember. If you love eating ice cream, an example of complex password can be “Ic3Cre@mSunda3!”
- If you don’t like remember many passwords, you can use a password manager so that it will take care of generating complex and randomized passwords for each website you visit, and you will only need to remember the master password. Don’t take our word for it, check out this list of recommended password managers: https://tinyurl.com/y7vuowqa
At the end of the day, knowledge about these scams and vigilance on our part will be our weapons against these criminal elements that want to steal your hard-earned money!
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