Value Added Tax (VAT) is a consumption tax imposed on the value added to goods and services at each stage of the production and distribution chain. In the context of real estate in the Philippines, VAT is applied to the sale, barter, exchange, lease, or disposition of real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business.
Here’s when VAT is applied when buying real estate in the Philippines:
- New Residential Properties: VAT is applicable when purchasing a brand new or newly developed residential property, such as a condominium unit or house and lot, from a VAT-registered seller (usually a property developer). The current VAT rate in the Philippines is 12%. This means that 12% VAT is added to the selling price of the property.
- Commercial and Industrial Properties: VAT is also applied to the sale of new commercial and industrial properties, including office spaces, retail spaces, and industrial buildings, when sold by a VAT-registered seller.
- Sale of Real Properties by VAT-Registered Individuals: If you are an individual seller who is VAT-registered and you sell a property that is considered a VATable transaction (e.g., a property used for business purposes), you may need to charge VAT to the buyer. However, if the property is considered a residential property (e.g., a house and lot used solely for residential purposes), the sale may be exempt from VAT if certain conditions are met.
It’s important to note that if the property you are purchasing is subject to VAT, the seller is required to issue an official receipt or sales invoice indicating the VAT separately. Buyers should carefully review the contract and supporting documents to understand whether VAT is included in the selling price or if it will be added on top of the agreed price. Additionally, consult with a real estate professional or tax advisor to ensure compliance with VAT regulations and to understand the implications for your specific real estate transaction.
The TRAIN Law introduced changes to VAT exemption rules in real estate transactions, outlined as follows:
a. Real properties not primarily intended for sale or lease in the regular course of business, and properties designated for socialized housing, are now exempt from VAT.
b. Previously set at Php1,919,500, the VAT exemption threshold for residential lots was reduced to Php1,500,000. Consequently, residential lots valued between Php1,500,001 and Php1,919,500, previously exempt, are now subject to VAT. Starting January 1, 2021, residential lots no longer qualify for VAT exemption.
c. The VAT exemption threshold for residential dwellings (including house and lots, condominiums) was reduced from Php3,199,200 to Php2,500,000. Therefore, houses and condos valued between Php2,500,001 and Php3,199,200, which were previously exempt, are now subject to VAT. Additionally, starting January 1, 2021, the exemption threshold was further reduced from Php2,500,000 to Php2,000,000. This threshold will be adjusted every three years based on the Consumer Price Index (CPI) published by the Philippine Statistics Authority (PSA).
d. Lease of residential units with a monthly rental not exceeding P15,000 remains exempt from VAT.
Let’s consider a scenario where you are purchasing a residential condominium unit for Php2,300,000 after the implementation of the TRAIN Law changes (post-January 1, 2021).
- Purchase Price of Condominium Unit: Php2,300,000
Since the purchase price of the condominium unit (Php2,300,000) is above the Php2,000,000 VAT exemption threshold for residential dwellings, VAT will be applicable to this transaction. The VAT is calculated as follows:
VAT = 12% of Php2,300,000
VAT = 0.12 × Php2,300,000
VAT = Php276,000
In this case, the VAT amount payable on the purchase of the condominium unit would be Php276,000. Therefore, the total amount to be paid for the property, including VAT, would be Php2,576,000.