Deed of Sale vs. Transfer of Rights: Less Tax and Easier Title Processing in the Philippine Context
Disclaimer: The following discussion provides general information and should not be considered legal advice. For specific concerns, always consult a qualified attorney or a licensed real estate practitioner.
1. Introduction
In the Philippines, individuals and entities frequently buy and sell real property for investment or residential purposes. Two common instruments to formalize these transactions are:
- Deed of Sale (often Deed of Absolute Sale)
- Transfer of Rights (or Assignment of Rights)
Although both can transfer interests in real estate, they differ in legal effect, tax obligations, title processing, and risks. Understanding these distinctions is crucial for anyone buying or selling property.
2. Overview of Key Concepts
2.1 Deed of Sale
A Deed of Sale is a notarized document in which a seller (vendor) transfers ownership of a specific property to a buyer (vendee) for a stated purchase price. A properly executed and registered Deed of Sale enables the buyer to obtain a new Certificate of Title under his or her name, thereby perfecting ownership.
Deed of Absolute Sale vs. Deed of Conditional Sale
A Deed of Absolute Sale signifies that the property is sold “as is,” with no further conditions precedent to completing the transfer of ownership. A Deed of Conditional Sale imposes certain conditions that must be met before title passes (e.g., full payment of the purchase price).Governing Laws
- Civil Code of the Philippines – Outlines the law on sales and obligations.
- Presidential Decree No. 1529 (Property Registration Decree) – Governs land registration processes.
- National Internal Revenue Code (NIRC) – Provides the tax framework for real property transactions.
2.2 Transfer of Rights (Assignment of Rights)
A Transfer of Rights (sometimes referred to as an Assignment of Rights or Assignment of Contract) does not, by itself, always transfer full legal ownership to a buyer. Instead, it typically transfers whatever contractual or equitable interest the original holder (assignor) has in the property to another party (assignee). Often used in the following situations:
- Pre-selling Real Estate – When the property is not yet fully constructed or titled, and the original buyer assigns his/her rights under a Contract to Sell with the developer to a new buyer.
- Properties with Incomplete or Problematic Title – When owners or claimants do not yet have a registered Certificate of Title in their name but hold certain rights or entitlements they wish to transfer.
- Heirs or Co-ownership Scenarios – When the property is covered by a judicial or extrajudicial settlement of estate, and one heir transfers or assigns his/her share to another.
A Transfer of Rights often requires fewer immediate taxes and fees—at least at the time of execution—because it is sometimes treated as an assignment of contractual interest rather than a direct sale of real property. However, ultimately, if the property is to be titled in the new party’s name, the relevant taxes and fees may still be triggered once the formal transfer of title is processed.
3. Tax Implications
3.1 Deed of Sale
Capital Gains Tax (CGT) or Creditable Withholding Tax (CWT)
- Capital Gains Tax: For sales of real property classified as capital assets, the seller typically pays a 6% CGT on the property’s selling price or zonal value, whichever is higher.
- Creditable Withholding Tax: For properties classified as ordinary assets (e.g., by real estate dealers or developers), a Creditable Withholding Tax may apply instead, with rates varying based on the property’s value.
Documentary Stamp Tax (DST)
- Levied at the rate of 1.5% of the higher of the selling price or the zonal/fair market value.
Transfer Tax
- Imposed by the local government (province or city), usually a small percentage of the property value.
Registration Fees
- Paid to the Registry of Deeds upon registration of the Deed of Sale.
Summary: A Deed of Sale leads to definitive ownership transfer, but requires payment of CGT (or CWT), DST, local transfer tax, and registration fees. These costs can be significant.
3.2 Transfer of Rights
In many cases, a Transfer of Rights does not automatically trigger the same level of taxes that a Deed of Sale does—primarily because the transaction can be viewed as assigning a contract rather than disposing of a “titled” real property. However:
Tax on Assignment of Rights
- If the Bureau of Internal Revenue (BIR) deems the transaction a sale of real property or a sale of a right tantamount to a real property sale, taxes similar to CGT/DST may apply.
- In practice, some parties attempt to minimize taxes by labeling a transaction as a mere “Transfer of Rights.” If the BIR or local authorities assess otherwise, the parties could face back taxes and penalties.
When Title is Finally Transferred
- Once the property is ready for titling (e.g., developer issues the final Deed of Sale or the original owner obtains the Certificate of Title), the applicable taxes (CGT, DST, transfer tax, etc.) generally become due.
Summary: While a Transfer of Rights might initially involve fewer taxes, the eventual transfer of the title in the buyer’s name typically triggers the standard taxes and fees.
4. Title Processing Considerations
4.1 Deed of Sale
Straightforward Path to Title
After execution of a notarized Deed of Sale, the buyer can proceed to:- Pay the required taxes at the BIR and obtain a Certificate Authorizing Registration (CAR).
- Pay the transfer tax at the local Treasurer’s Office.
- Register the Deed of Sale with the Registry of Deeds and secure a new Transfer Certificate of Title (TCT) or Condominium Certificate of Title (CCT).
- Update tax declaration records with the Assessor’s Office.
Easier Recognition by Agencies
A notarized and duly registered Deed of Sale is widely recognized by government agencies, financial institutions, and private entities.
4.2 Transfer of Rights
Limited to the Right or Interest Held
If the seller/assignor does not yet have a registered title (or if the property is still under a Contract to Sell), the transferee/assignee can only step into the assignor’s contractual shoes. The actual title remains in the name of the original seller (often the developer or another party).Potential Delays in Title Issuance
The buyer may have to wait until the original seller (e.g., the developer) executes a Deed of Sale in his or her favor (or until the title is issued in the name of the original owner, who then transfers it to the assignee). This can add layers of complexity and time.Required Consents
Many developers or lenders require that any Transfer of Rights be approved and properly documented (e.g., an Authority to Transfer and other administrative requirements), often with fees for processing or “transfer charges.”Future Taxes
Ultimately, when the time comes to transfer the actual Certificate of Title to the assignee’s name, standard taxes (CGT or CWT, DST, transfer tax) typically become due.
5. Which Is Easier and Less Taxing?
Short-Term Tax Perspective
- A Transfer of Rights can appear cheaper initially because it may defer some taxes and fees. However, once the property is actually transferred and titled, the taxes are largely unavoidable.
Long-Term Perspective & Easier Title Processing
- A Deed of Sale is more transparent, straightforward, and typically preferred by banks, financial institutions, and governmental agencies. The taxes and fees are due immediately, but the new owner can quickly secure the title in his or her name.
- A Transfer of Rights can lead to confusion or disputes if the property is sold multiple times via successive Transfers of Rights without actual titling. It can also pose challenges with financing or future resale unless the final title transfer is properly completed.
Risks of an Unclear Paper Trail
- Repeated Transfers of Rights create a paper trail that may cause skepticism or legal issues when the last assignee finally proceeds to title the property.
- Verifying the chain of assignment becomes critical, and any missing signatures or unapproved assignments by the developer can complicate final titling.
6. Pros and Cons at a Glance
| Method | Pros | Cons |
|---|---|---|
| Deed of Sale | - Direct and complete legal transfer of ownership - Easier to get financing - Straightforward title processing |
- Immediate payment of taxes & fees - Capital Gains Tax (CGT) or Creditable Withholding Tax, DST, transfer tax can be costly |
| Transfer of Rights | - Potentially lower initial tax/fee outlay - Feasible for properties not yet titled or under Contract to Sell |
- Not an outright transfer of legal ownership - Future taxes generally still apply - More steps to get final Certificate of Title - Possible developer consent/fees required |
7. Practical Tips
Check the Property’s Status
- Verify if the property already has a clean Transfer Certificate of Title (TCT). If so, a Deed of Sale might be more efficient and secure.
- If the property is under Contract to Sell (e.g., pre-selling condos or subdivisions), determine if the developer allows a Transfer of Rights and the associated fees.
Know Your Tax Obligations
- Consult with a tax professional or the BIR’s local office to understand the applicable taxes, especially if the transaction is a large purchase.
- Ensure that any Transfer of Rights is still compliant with local tax laws and that you have a plan for paying the necessary taxes when the final transfer or titling is executed.
Obtain Legal Advice
- Engage a licensed lawyer or real estate practitioner to review all documents. This reduces risks of void transactions, hidden encumbrances, or future title disputes.
Avoid Multiple Transfers of Rights Without Titling
- It is common but risky in certain developments. Always check the track record of sellers/developers who use this practice.
- If the property changes hands several times before any actual Deed of Sale is signed by the titled owner, extra diligence is required to ensure the chain of assignment is valid and recognized.
Notarization and Registration
- For a Deed of Sale, notarization is mandatory for validity; registration with the Registry of Deeds perfects the real property transfer against third parties.
- For a Transfer of Rights, at least have the assignment document notarized to ensure authenticity. If local regulations or developer protocols require registration (or annotation in the mother title), comply with those as well.
8. Conclusion
A Deed of Sale provides a more direct and robust transfer of legal ownership, facilitating easier title processing—albeit at the cost of paying the required taxes up front. A Transfer of Rights can offer initial tax and fee savings, particularly for properties not yet titled, but ultimately requires careful documentation and may still incur standard property transfer taxes down the line.
In the Philippine setting, if the primary goal is to secure and register the title efficiently, a Deed of Sale is often the more reliable route. If the property is still under contract or facing complex titling issues, a Transfer of Rights might be the temporary workaround—just be prepared for the deferred (and sometimes inevitable) tax obligations and the need for additional paperwork later on.
Always consult a qualified lawyer or real estate professional to navigate these legal instruments safely and to ensure compliance with Philippine laws and regulations.