Below is a comprehensive overview of what you need to know about transferring real property from a parent in the Philippines by either a Deed of Donation or a Deed of Sale. Note that this article is for general informational purposes only and not intended as legal advice. When dealing with specific cases, it is recommended to consult a licensed Philippine attorney.
1. Introduction
Transferring real property from a parent to a child (or any other family member) in the Philippines can be done in several ways. The two most common are:
- Deed of Donation (Donación Inter Vivos): A gratuitous transfer (i.e., without monetary consideration) from a donor (the parent) to a donee (the child).
- Deed of Sale: A transfer for valuable consideration (the child pays the parent an agreed purchase price).
Each has its own set of legal requirements, tax implications, and processes. Understanding these differences is crucial for ensuring a smooth transfer while complying with Philippine laws.
2. Legal Framework
Several laws and regulations govern property transfers in the Philippines:
New Civil Code of the Philippines (Republic Act No. 386):
- Governs donations (Articles 725–773) and sales (Articles 1458–1637).
- Defines formalities and essential requisites of contracts and donations.
Family Code of the Philippines (Executive Order No. 209):
- Contains provisions on family rights, including the concept of legitimes (which affects how much a parent can donate without prejudicing the forced heirs’ shares).
Tax Code of the Philippines (National Internal Revenue Code, as amended):
- Governs donor’s tax, capital gains tax, and documentary stamp tax for property transfers.
Local Government Code (Republic Act No. 7160):
- Authorizes local governments to collect transfer taxes and other fees on real property.
Bureau of Internal Revenue (BIR) Regulations:
- Provides guidance on computation and payment of taxes relevant to property transfers.
3. Key Concepts and Distinctions
3.1 Deed of Donation (Donación Inter Vivos)
- Definition: A Deed of Donation is a legal document where the donor (parent) voluntarily and freely transfers ownership of a property to the donee (child) without receiving anything in return.
- Gratuitous Transfer: No monetary or other material consideration is involved.
- Formal Requirement: Under Philippine law, a donation of real property must be in a public instrument (notarized document).
- Acceptance: The donee (child) must accept the donation (usually indicated in the same deed or a separate notarized instrument) for the donation to be valid.
3.2 Deed of Sale
- Definition: A Deed of Sale transfers ownership of real property in exchange for payment of a certain price or monetary consideration.
- Sale Price: Even if a parent sells a property to a child, the law expects a reasonable valuation or at least a minimum basis for BIR tax calculations (usually the fair market value or zonal value, whichever is higher).
- Formal Requirement: Similar to a donation, a sale of real property must also be in a public instrument (notarized), and must indicate the agreed purchase price.
4. Legal Requirements and Steps
4.1 Drafting the Deed
- Deed of Donation or Sale:
- Parties: Clearly identify the donor (or seller) and the donee (or buyer).
- Details of the Property: Include the full technical description from the Transfer Certificate of Title (TCT) or Original Certificate of Title (OCT).
- Consideration (for Sale): Specify the purchase price if it is a sale.
- Signatures: Both parties must sign the deed in the presence of a notary public.
- Acceptance (for Donation): The donee (child) must explicitly accept the donation in the same deed or a separate notarized document.
4.2 Notarization
- After drafting the deed, take it to a notary public for notarization.
- In the Philippines, a document transferring real property must be in a public instrument to be valid. Notarization also helps ensure the document’s enforceability.
4.3 Payment of Taxes
Obtain a Tax Clearance or Certificate Authorizing Registration (CAR) from the BIR.
- You must submit the notarized deed to the BIR for computation of the relevant taxes.
For a Deed of Donation:
- Donor’s Tax: Under current laws (TRAIN Law, effective 2018), donor’s tax is 6% of the total gifts made in excess of PHP 250,000 in a calendar year.
- Documentary Stamp Tax (DST): Usually 1.5% of the property’s fair market value or zonal value, whichever is higher.
For a Deed of Sale:
- Capital Gains Tax (CGT): Generally 6% of the gross selling price or fair market value (zonal valuation), whichever is higher, if the property is a capital asset.
- Documentary Stamp Tax: 1.5% of the property’s selling price or fair market value, whichever is higher.
- Withholding Tax on Sale (if applicable): In certain cases, particularly for ordinary assets, a different tax scheme may apply. However, most residential properties owned by parents for personal purposes are typically considered capital assets.
Local Transfer Taxes:
- Paid at the city or municipal assessor’s or treasurer’s office. Rates vary depending on the local government unit (LGU).
4.4 Registration with the Registry of Deeds
- Once the BIR issues the Certificate Authorizing Registration (CAR) and all taxes are paid, submit the following to the Registry of Deeds:
- Original copy of the notarized deed (Donation or Sale).
- Owner’s duplicate certificate of title.
- CAR and proof of tax payments (official receipts).
- Transfer tax receipt from the LGU.
- The Registry of Deeds will cancel the old title and issue a new one under the child’s name.
5. Tax Implications in Detail
5.1 Donor’s Tax vs. Capital Gains Tax
Donor’s Tax (Donation):
- Rate: 6% on the total net gifts made over PHP 250,000 in one year.
- The net gift is usually based on the fair market value (often the zonal valuation or assessed value).
- If the donor has made other donations within the same calendar year, the amounts are accumulated for the threshold and calculation.
Capital Gains Tax (Sale):
- Rate: 6% of either (a) the selling price indicated in the Deed of Sale, or (b) the fair market value (zonal valuation), whichever is higher.
- Typically, the BIR will use the zonal valuation if it is higher than the contract price.
5.2 Documentary Stamp Tax (DST)
- DST is generally 1.5% on the higher between the selling price or the fair market value for both donations and sales.
5.3 Possible Understatement of Consideration
- If the sale amount in the Deed of Sale is unreasonably low (for instance, if a parent simply wants to avoid donor’s tax), the BIR might assess additional taxes based on the property’s zonal valuation or fair market value.
6. Effects on Inheritance and Forced Heirs
6.1 Legitimes Under Philippine Law
- Children have a right to a portion of a parent’s estate, known as legitime. If a donation exceeds what a parent can freely dispose of, it may be reduced upon the parent’s death to protect the forced heirs’ shares.
6.2 Donation Inter Vivos vs. Donation Mortis Causa
- Donation Inter Vivos: Takes effect during the lifetime of the donor. Subject to donor’s tax.
- Donation Mortis Causa: Essentially a testamentary disposition taking effect upon the donor’s death; governed by estate tax rules, not donor’s tax.
7. Comparing Which Method Is Best
Deed of Donation
- Advantages:
- Potentially less complicated if the parent truly intends a gift.
- No need to create a simulated or undervalued sale.
- Disadvantages:
- 6% donor’s tax (less the PHP 250,000 annual exemption).
- Must ensure the donation does not impair legitimes.
- Advantages:
Deed of Sale
- Advantages:
- For property that might have a low historical cost or where the parent wants partial compensation, a sale formalizes the transaction at market value.
- Potentially straightforward acceptance by third parties (banks, other institutions) since it is a standard sale transaction.
- Disadvantages:
- 6% capital gains tax plus 1.5% documentary stamp tax (based on the higher of selling price or fair market value).
- If the transaction is obviously below market value, BIR may reclassify it as a donation or impose additional taxes.
- Advantages:
8. Practical Considerations and Steps to Ensure a Smooth Transfer
- Determine True Intent: If the transfer is purely gratuitous, a Deed of Donation is more appropriate. If there is a genuine sale or partial payment, then a Deed of Sale is proper.
- Assess Tax Implications:
- Compare the potential donor’s tax vs. capital gains tax.
- Check the property’s zonal value to estimate the tax base.
- Check the Family Situation: Ensure the donation does not violate the legitime rights of other heirs.
- Gather All Required Documents:
- Original TCT or OCT
- Tax Declaration from the Assessor’s Office
- Valid government IDs of both parties
- Any proof of payment if it is a sale
- Engage Professionals:
- A lawyer can prepare and review the deed to ensure compliance.
- A real estate broker or appraiser can help determine fair market values.
- A notary public will notarize the deed.
- Monitor Deadlines:
- Donor’s tax must be filed and paid within 30 days from the date of donation.
- For a sale, you generally have 30 days from notarization to file the Capital Gains Tax return.
- Keep Copies and Receipts: Safeguard notarized documents, tax receipts, and the new title.
9. Common Pitfalls and How to Avoid Them
Underdeclaring the Purchase Price
- Attempting to lower the sale price to reduce taxes can lead to penalties. BIR has the authority to impose taxes based on zonal values or fair market values.
Failing to Follow Donation Formalities
- A verbal donation or an unnotarized donation of real property has no legal effect.
Not Paying Taxes On Time
- Late payment results in surcharges and interest, which can be substantial.
Overlooking the Legitimes
- If there are multiple children or forced heirs, a donation that infringes their legitimes can be contested later during estate settlement.
Forgetting Local Transfer Taxes
- Even if BIR taxes are paid, failure to settle local transfer tax can delay or invalidate the registration process.
10. Conclusion
Transferring real property from a parent to a child in the Philippines can be accomplished through either a Deed of Donation or a Deed of Sale, each with distinct legal and tax consequences. The decision often depends on the true intention of the transfer, tax considerations, and family dynamics (especially with regard to legitimes and heirs).
To navigate the complexities, it is best to consult an attorney who can help ensure compliance with formal requirements, advise on the best mode of transfer, and guide you through the associated tax obligations. Proper planning, timely payment of taxes, and precise drafting of legal documents are crucial to a smooth and valid property transfer.
Disclaimer: This article is for general informational purposes only and should not be taken as legal advice. For specific transactions or disputes, you should consult a licensed attorney in the Philippines.