Fundamentals of Real Estate Property Ownership in the Philippines
General Rule of Holding or owning a Real Estate in the Philippines
1. General Rule – only Filipino citizens and corporations at least sixty percent of the capital of which is owned by Filipino are entitled to acquire and own land in the Philippines.
2. Exceptions to General Rule – Alien acquisition of real estate in the Philippines is allowed in the following cases:
a) Acquisition before the 1935 Constitution;
b) Acquisition thru hereditary succession if the alien acquires is a legal heir.
c) Purchase of not more than forty percent interest in a condominium project.
d) Purchase by former natural-born Filipino citizens subject to the limitations prescribed by law (Batas Pambansa 185 and R.A. 8179).
3. A Filipino who marries an alien retains her Philippine citizenship (unless by her act or omission she is deemed to have renounced Philippine citizenship), and may therefore acquire real estate in the Philippines.
General Rule of Holding or owning a Real Estate in the Philippines
1. General Rule – only Filipino citizens and corporations at least sixty percent of the capital of which is owned by Filipino are entitled to acquire and own land in the Philippines.
2. Exceptions to General Rule – Alien acquisition of real estate in the Philippines is allowed in the following cases:
a) Acquisition before the 1935 Constitution;
b) Acquisition thru hereditary succession if the alien acquires is a legal heir.
c) Purchase of not more than forty percent interest in a condominium project.
d) Purchase by former natural-born Filipino citizens subject to the limitations prescribed by law (Batas Pambansa 185 and R.A. 8179).
3. A Filipino who marries an alien retains her Philippine citizenship (unless by her act or omission she is deemed to have renounced Philippine citizenship), and may therefore acquire real estate in the Philippines.
Acquisition by Formal Natural-Born Filipino Citizens
1. Mode of acquisition is not limited to voluntary deeds (such as sale or donation) but includes involuntary deeds (such as tax sale, foreclosure sale, or execution sale).
2. Maximum area that may be acquired is as follows :
a) For residential purpose – 1,000 square meters of urban land or one hectare of rural land.
b) For business purpose – 5,000 square meters of urban land or three hectares of rural land.
“Business purpose” refers to the use of the land primarily, directly, and actually in the conduct of business or commercial activities in the broad areas of agriculture, industry and services, including the lease of land, but excluding the buying and selling thereof.
3. In case of married couple where both spouses are former natural-born Filipino citizens, one or both of them may avail of the privilege, provided that the total acquisition shall not exceed the maximum area allowed.
4. A transferee who already owns urban or rural land for residential purpose acquired while still a Filipino citizen, may acquire additional urban or rural land for residential purpose which, when added to that already owned by him, shall not exceed the maximum area allowed by law.
The same privilege applies to a transferee who already owns urban or rural land for business purpose.
5. A transferee who already acquired urban land for residential purpose shall be disqualified to acquire rural for residential purpose, and vice-versa. The same rule applies to a transferee of land for business purpose.
However, a transferee of residential land under B.P. 185 may still avail of the privilege to acquire land for business purpose under R.A. 8179.
6. For registration of a conveyance in favor of the transferee, he must submit to the Register of Deeds a sworn statement on the following: date and place of birth; name of parents, brothers, sisters, and spouse; location, area and mode of acquisition of present landholding; date when he lost his Philippine citizenship; and his present citizenship.
For transferees of land for residential purpose, the sworn statement shall include his intention to reside permanently in the Philippines.
For transferees of land for business purpose , the sworn statement shall include a declaration to use the land for business purpose. Furthermore, the transferee shall submit a certification of business name registration with the Bureau of Trade Regulation and Consumer Protection. And in case the land is agriculture, he shall likewise submit a certification from the Department of Agrarian Reform that the land is a retained area of the transferor and an affidavit of the transferee that the total landholding inclusive of the land to be acquired does not exceed five hectares.
Lands of the Public Domain
1. Under the Constitution, lands of the public domain are classified into agricultural, forest or timber, mineral, and national parks.
2. Alienable lands of the public domain shall be limited to agricultural lands.
3. Filipino citizens may acquire alienable lands of the public domain not more than twelve hectares by purchase , homestead , or patent ; or lease not more than 500 hectares.
Private corporations cannot acquire, but may only lease alienable lands of the public domain for a period not exceeding twenty-five years, renewable for the same term, and not to exceed 1,000 hectares.
Stewardship Concept of Ownership
Ownership carries with it a social obligation. As stewards of their land, owners are obliged to use their property to promote not only their interest but also the general welfare. When a person’s landholding exceeds the requirement of his needs, or his utilization is not conducive to general welfare, the State may exercise its power to regulate and control ownership.
Fee Simple
This refers to the “bundle of rights” or attributes which are inherent or appurtenant to ownership, without any limitation or restriction other than those imposed by law or contract. The bundle of rights includes the right to use, to possess, to the fruits, to dispose, and to vindicate or recover.
a) For residential purpose – 1,000 square meters of urban land or one hectare of rural land.
b) For business purpose – 5,000 square meters of urban land or three hectares of rural land.
“Business purpose” refers to the use of the land primarily, directly, and actually in the conduct of business or commercial activities in the broad areas of agriculture, industry and services, including the lease of land, but excluding the buying and selling thereof.
3. In case of married couple where both spouses are former natural-born Filipino citizens, one or both of them may avail of the privilege, provided that the total acquisition shall not exceed the maximum area allowed.
4. A transferee who already owns urban or rural land for residential purpose acquired while still a Filipino citizen, may acquire additional urban or rural land for residential purpose which, when added to that already owned by him, shall not exceed the maximum area allowed by law.
The same privilege applies to a transferee who already owns urban or rural land for business purpose.
5. A transferee who already acquired urban land for residential purpose shall be disqualified to acquire rural for residential purpose, and vice-versa. The same rule applies to a transferee of land for business purpose.
However, a transferee of residential land under B.P. 185 may still avail of the privilege to acquire land for business purpose under R.A. 8179.
6. For registration of a conveyance in favor of the transferee, he must submit to the Register of Deeds a sworn statement on the following: date and place of birth; name of parents, brothers, sisters, and spouse; location, area and mode of acquisition of present landholding; date when he lost his Philippine citizenship; and his present citizenship.
For transferees of land for residential purpose, the sworn statement shall include his intention to reside permanently in the Philippines.
For transferees of land for business purpose , the sworn statement shall include a declaration to use the land for business purpose. Furthermore, the transferee shall submit a certification of business name registration with the Bureau of Trade Regulation and Consumer Protection. And in case the land is agriculture, he shall likewise submit a certification from the Department of Agrarian Reform that the land is a retained area of the transferor and an affidavit of the transferee that the total landholding inclusive of the land to be acquired does not exceed five hectares.
Lands of the Public Domain
1. Under the Constitution, lands of the public domain are classified into agricultural, forest or timber, mineral, and national parks.
2. Alienable lands of the public domain shall be limited to agricultural lands.
3. Filipino citizens may acquire alienable lands of the public domain not more than twelve hectares by purchase , homestead , or patent ; or lease not more than 500 hectares.
Private corporations cannot acquire, but may only lease alienable lands of the public domain for a period not exceeding twenty-five years, renewable for the same term, and not to exceed 1,000 hectares.
Stewardship Concept of Ownership
Ownership carries with it a social obligation. As stewards of their land, owners are obliged to use their property to promote not only their interest but also the general welfare. When a person’s landholding exceeds the requirement of his needs, or his utilization is not conducive to general welfare, the State may exercise its power to regulate and control ownership.
Fee Simple
This refers to the “bundle of rights” or attributes which are inherent or appurtenant to ownership, without any limitation or restriction other than those imposed by law or contract. The bundle of rights includes the right to use, to possess, to the fruits, to dispose, and to vindicate or recover.
Limitations to Bundle of Rights
Legal or Governmental Limitations:
a) Zoning – refers to land use classifications and the allowable utilization under each classification.
b) Taxation – the power of the government or any of its political subdivisions to impose charge or burden upon persons, property or property rights for the use and support of the government.
c) Eminent Domain – the power of the State or any of its instrumentalities to take private property for public use and payment of just compensation.
d) Other provisions of law such as legal easement, the requirement of legitime in succession, prohibition against sale and encumbrance of property acquired by patent, rent control, laws on subdivision development, urban and agrarian reform, etc.
What is "Title"?
“Title” is not synonymous with Torrens Certificate of Title. Rather, it is a generic word which means proof, evidence, or monument of ownership, such as tax declaration, realty tax receipts, deed of sale, and Torrens Certificate of Title. But, of course, the best title or best evidence of ownership is the Torrens Title because it is indefeasible, imprescriptibly, and binding against the whole world.
What are the modes of acquiring a Title?
1. Private Grant - voluntary transfer or conveyance of private property by a private owner, such as sale or donation.
2. Public Grant – acquisition of alienable lands of the public domain by homestead patent, free patent, sales patent, or other government awards.
3. Involuntary Grant – acquisition of private party against the consent of the former owner, such as foreclosure sale, execution sale, or tax sale.
4. Inheritance – acquisition of private property through hereditary succession.
5. Reclamation – filling of submerged land, subject to existing laws and government regulations.
6. Accretion – acquisition of more lands adjoining the banks of rivers due to the gradual deposit of soil as a result of the river current.
7. Prescription – acquisition of title by actual, open, continuous, and uninterrupted possession in the concept of owner for the period required by law.
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How do foreigners invest in real estate in the Philippines?
Foreigners may indirectly own land by investing in Philippine corporations registered with the SEC subject to the foreign equity restrictions for ownership of private land. Such Philippine corporations may then acquire the land for example, Ownership of Condominium Units.
Can foreigners directly buy real estate properties in the Philippines?
Unlike private land, foreign nationals and foreign corporations may directly own a condominium unit. However, the land on which the condominium building stands must be owned by the condominium corporation. When a person buys a condominium unit, he automatically becomes a member of the condominium corporation which owns the land. Under Philippine law, foreigners are allowed to become members or stockholders of the condominium corporation which owns the land, but only up to a maximum of 40% of the capital stock of the condominium corporation.
The transfer of a condominium unit shall include the transfer of the appurtenant membership or stock-holding in the corporation. No transfer or conveyance of a condominium unit shall be valid if the concomitant transfer of the appurtenant membership or stock-holding in the condominium corporation to a foreigner causes the alien interest in such corporation to exceed 40%.
Foreigners seeking to retire in the Philippines.
Foreigners intending to retire in the Philippines may apply for the Special Resident Retiree's Visa ("SRRV"), a special non-immigrant visa issued by the Philippine Bureau of Immigration to foreigners through the retirement program of the Philippine Retirement Authority ("PRA"). For the SRRV to be issued, the PRA requires that a minimum investment shall be deposited in a PRA-accredited bank by the foreigner. It may only be withdrawn if the foreigner withdraws from the PRA retirement program. Once issued, the SRRV entitles its holder to multiple entry privileges with the option to reside permanently in the Philippines.
Other benefits under the retirement program include exemption from exit clearance and re-entry permits; exemption from customs duties and taxes for the importation of personal effects up to US$7,000; exemption from travel tax if the stay in the Philippines is less than a year from the last entry date; exemption from the Bureau of Immigration's annual registration requirement; assistance in obtaining an Alien Employment Permit; tax-free remittance of annuities and pensions; and guaranteed repatriation of the investment. The minimum amount of investment required is generally US$75,000, if the foreigner is 35 to 49 years old, and US$50,000, if 50 years old and above. The minimum investment policy doesn't only apply to foreigners, former Philippine citizens and former Ambassadors are required a minimum investment of US$1,500, while retired employees of the Asian Development Bank are required a minimum investment of US$25,000. The foregoing investment may, at the option of the foreigner, be converted to Philippine Pesos or into an approved area of investment such as investment in shares of Philippine corporations as above-discussed.
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What are the taxes and fees relating to buying real estate properties in the Philippines?
For Real Estate Property:
Income Tax
If you are a corporation, or individual who is a Philippine resident, and engaged in real estate business, you will be subject to an ordinary income tax of up to 35% on the income derived from the sale of property. As a general rule, your buyer will be required to withhold 5% of the purchase price, zonal value or the market value under the Tax Declaration of the property, whichever is higher, and pay the same to the BIR to be credited to your potential income tax liability.
Capital Gains Tax
If you are a corporation or individual (whether a Philippine resident or not), not engaged in the real estate business and the property is not used in the ordinary course of your business, the property will be treated as a capital asset. As such, the sale shall be subject to capital gains tax at the rate of 6% of the purchase price, zonal value or the market value under the Tax Declaration of the property, whichever is higher.
Value-Added Tax
If you are engaged in the real estate business, the sale of real property is subject to value added tax at the rate of 12% of the purchase price, zonal value or market value under the Tax Declaration, whichever is higher, except where the property sold is a residential lot with price below P1,500,000 or a residential dwelling with price below P2,500,000.
If the Seller is a corporation or individual not engaged in the real estate business and the property was not used in the ordinary course of the corporation’s business, the sale is not subject to value-added tax.
Documentary Stamp Tax
Documentary stamp tax at the rate of 1.5% of the purchase price, zonal value, or TD value of the property, whichever is higher, is payable upon the execution of the DOS to the BIR.
Local Transfer Tax
Local transfer tax is imposed by the local government unit where the property is located generally at the rate of 50% of 1% of the purchase price, zonal value, or TD value of the property, whichever is higher.
Registration Fees
Registration fees are payable to the Registry of Deeds where the property is located at the rate of P8,796.00 for the first P1.7million, plus P90.00 for every P20,000.00 or fraction thereof in excess of P1.7 million.
For Sale of Shares in a Corporation Owning Real Property:
The sale of shares is typically subject to the following transaction costs:
Capital Gains Tax
The sale of shares not traded through the stock exchange shall be subject to a final tax at the rate of 5% of the first P100,000.00 of net gain derived from the sale, and an additional 10% in excess thereof..
Documentary Stamp Tax
Documentary stamp tax on the transfer of shares are payable at the rate of 0.75 for every 200.00, or fraction thereof, based on the par value of the shares.
For Other Modes of Unloading Property:
Ownership of assets (whether shares of stock or real property) may also be transferred through donation or succession.
The transfer of property by succession is subject to estate tax at a rate based on the total value of the net estate. The net estate is the total gross estate of the decedent less allowable deductions. For purposes of computing the gross estate, the fair market value of real property transferred by succession shall be the higher of the zonal value or the market value under the Tax Declaration of the real property. The estate tax imposed under Philippine tax laws shall be credited with any estate tax that the estate of the non-resident decedent may have paid to the authority of a foreign country, subject to certain limitations.