The Tax Reformation for Acceleration and Inclusion (TRAIN) bill was signed into law on the 19th of December 2017 and has immediately taken effect on 1 January 2018. It is said to allow a simpler, fairer, and much efficient tax system for the Filipinos. In general, TRAIN Law aims to reduce personal income tax while imposing higher tax on certain products like sweetened beverages, oil, petroleum, and fuel products, coal, stocks, automobiles, and others. While the spotlight has been focused on personal tax income reduction and increased fuel prices of fuel products, let’s have a look on how the real estate system is faring aboard the TRAIN.
1. Estate Tax
In the previous system, estate tax, or the tax imposed on inherited properties, was computed based on a schedule wherein properties worth Php200,000.00 and more are taxed between 5 to 20%. Under the TRAIN, lawful heirs and beneficiaries would only have to settle a flat rate of 6%.
Another significant change is that TRAIN Law exempted the following from estate tax: estate properties with a net value of Php5 million pesos and below; and family homes worth Php10 million and below. Previously, only family homes worth Php1 million and below are exempted from tax.
2. Estate Tax Deductions
The new system also imposed changes on the allowable deductions on the gross estate of an individual. TRAIN Law has removed (1) funeral expenses, (2) judicial expenses, and (3) medical expenses from the allowable deductions.
To make up for the removable of the mentioned provisions, TRAIN increased the Standard Deduction to Php5 million, which was pegged at only Php1 million in the previous system. Further, the Standard Deduction shall only be enjoyed by citizens (resident and non-resident) and resident aliens. Non-resident aliens may still avail Standard Deductions but only up to a maximum of Php500,000.00.
3. Estate Tax Settlement
A. CPA Certifications
Certified Public Accountant (CPA) certifications are now required for estate tax returns exceeding a gross value of Php5 million. In the late system, CPA certifications are already required for estate tax returns exceeding Php2 million.
B. Filing Period
TRAIN Law amended the allowed period for filing of estate-tax returns from 6 months from the decedent’s death to 1 year.
C. Installment payment
The TRAIN implies that full estate-tax liability must be settled within two years – this limit was not included in the previous tax system.
4. Real Estate Transactions and VAT
TRAIN imposed the following on VAT exemption provisions regarding real estate transactions:
a. Real properties not primarily held for sale to customers or for lease in the ordinary course of trade or business, and properties utilized for socialized housing shall be exempted from VAT.
b. Previously at Php1,919,500, TRAIN lowered the VAT exemption of residential lots to Php1,500,000. This means residential lots that were previously tax exempt (worth Php1,500,001 to Php1,919,500) are now subject to VAT. Further, beginning January 1, 2021, residential lots will no longer be qualified for VAT exemption.
c. TRAIN also lowered the VAT exemption of residential dwellings (house and lots, condominiums) from Php 3,199,200 to Php 2,500,000. This means houses and condos that were previously tax exempt (worth Php2,500,001 to Php3,199,200) are now subject to VAT. Further, effective January 1, 2021, the exemption shall be lowered again from Php2,500,000 to Php2,000,000, and every three years thereafter, the amount stated shall be adjusted to its present value using the Consumer Price Index (CPI) as published by the Philippine Statistics Authority (PSA).
d. Lease of residential unit with a monthly rental not exceeding P15,000 shall be exempted from VAT.
