“With this pandemic and all the deaths around us, you really don’t know when you will be ‘kidnapped’.” This was the reasoning of my physically fit friend and golf buddy in his fifties who sought my advice on how to transfer the titles of his property to his children in a tax efficient manner. He wanted to treat it with some urgency. I thought maybe I should give the advice urgently, because “You don’t know when you will be“ kidnapped ”” applies to both sides in this consultation.
Could also do an article for my readers this Sunday because we all don’t know when, right?
When it comes to estate planning, almost any of us can dismiss the fact that it is the problem of the very wealthy or of those who are leaving property that is worth fighting for. But when you talk about inheritance tax planning, you can’t dismiss it even if you have less. Not when you convert the small savings and find that the amount saved can be used to buy a car, change the entire canopy of your home, or buy gadgets for the whole family.
Here are some thoughts:
1. Sell, bequeath or give away
When we talk about land that is a capital asset (residential or invested but not used for business), each transition is subject to six percent of the market value (FMV). For taxes, the Floor FMV is the zone value or, if there is no zone value in the area yet, the market value stated on the property’s property tax return.
People are used to selling the property only to pay the lower six percent capital gains tax, because under the old tax law, inheritance and gift tax rates are much higher. Note, however, that even today selling to your children or heirs without collecting the proceeds can technically lead to two tax subsidies: the six percent capital gains tax on the sale and then the six percent gift tax on the sale price that you don’t collect or waive .
Perhaps it would be better if you just wait for the succession to occur (to be “taken”), because the inheritance tax is also six percent of the zone value of the property and the estate can be deductible (like the P5 million standard.) . Deduction and the value of the family house up to 10 million pesos).
A donation today should not be dismissed immediately, as this may actually be the right way to go. Although it is the same price, you can control the cost as it is based on the zoned value of the property today rather than 10, 20 or 30 years if you pass in the future when the property’s value can be that much higher.
2. From the individual to the one-person society (OPC)
If your properties are making a profit, e.g. For example, renting out real estate, and you are an individual, you can pay the eight percent fixed tax if your annual turnover is less than 3 million pesos. In this case, you can stay as an individual. If you exceed that income limit, it pays to be a corporation. You can benefit from more deductions because a company can deduct direct costs (if you are a lessor, these are depreciation and repair costs) as well as other business expenses. Instead of these other operating expenses, however, an optional deduction of 40 percent of gross income (sales less direct costs) can be claimed. Note that no supporting documents are required to prove the optional deduction.
Thanks to the new tax law, you can transfer your property to your OPC tax-free and don’t need a BIR judgment to get an exemption. You can also limit liability to the extent of your assets in the OPC, while as an individual you are liable up to your personal assets.
3. If you are a foreigner, be sure to read this part
There are several cases in court, and many others that have not gone to court, regarding a foreigner’s right to reclaim their investments in land purchased on behalf of their Filipino partner. Some only use their surplus funds, others use their retirement money to invest in real estate here. Since foreigners cannot own land in the Philippines, the property is bought on behalf of the Filipina. If they’re not married, co-ownership rules seem to apply to properties bought by pool funds, but no. If the relationship gets really sour, the foreigner can’t even reclaim half the property’s value from the Filipina.
The court has ruled that foreigners cannot come to court with clean hands as it is illegal to buy land in the Philippines. And since a foreigner’s property is void, no implicit trust in the funds is created, so he loses everything. He can only get his hands on the property if he marries the Filipina, who later dies before him because he can be entitled to inherit private land.
Otherwise, foreigners should stick with buying condominium. Or, if they need to buy land, make this a formal business arrangement with the Filipina as their business partner. As a corporation, the foreign individual shareholder can indirectly own up to 40 percent real estate.
As for the above cases where Filipina initially issued all property titles under their name, it can say that inheritance tax planning is loose change. I’ve also seen that loyalty and fairness have a much greater value.
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Alexander B. Cabrera is Chairman and Senior Partner of Isa Lipana & Co./PwC Philippines. He chairs the Integrity Initiative, Inc. (II, Inc.), a not-for-profit organization that promotes common ethical and acceptable standards of integrity. Email your comments and questions to ph_aseasyasABC@pwc.com.