Below is an extensive overview of tax and expense allocation in real estate transactions under Philippine law. This article covers the primary taxes, fees, and relevant rules to help practitioners and laypersons understand what is involved, how these charges are computed, and who is typically responsible for payment. While practices may vary based on contract stipulations, this article focuses on the standard rules and common conventions in the Philippines.

I. Introduction

Real estate transactions in the Philippines are subject to various taxes, fees, and other charges. These are imposed by the national government—primarily through the Bureau of Internal Revenue (BIR)—and local government units (LGUs). For the parties involved (i.e., the buyer and the seller), understanding how these taxes and expenses are allocated is crucial to avoid legal complications, penalties, and unexpected costs.

II. Overview of Key Taxes and Fees

1. Capital Gains Tax (CGT)

What it is: Capital Gains Tax applies when real property (classified as capital asset) is sold, exchanged, or otherwise transferred.
Applicable Rate: Generally 6% on the gross selling price, or the fair market value (FMV) of the property as determined by the BIR or the provincial assessor (whichever is higher).
Who Pays: Under standard practice, the seller (transferor) shoulders the CGT. However, this can be negotiated in the contract.
Legal Basis: Section 24(D) of the National Internal Revenue Code (NIRC), as amended.

2. Creditable Withholding Tax (CWT) as an Alternative

What it is: For dealers in real estate, developers, or persons habitually engaged in the real estate business, the sale of property may be subject to Creditable Withholding Tax rather than CGT.
Applicable Rate: Varies between 1.5% to 6% of the selling price, zonal value, or FMV—depending on certain thresholds and conditions specified in BIR Revenue Regulations (e.g., Revenue Regulations No. 2-98, as amended).
Who Pays: Technically the buyer withholds and remits the tax to the BIR, but in practice, this expense may be factored into the total cost arrangement.
Legal Basis: NIRC, particularly provisions addressing withholding tax and Revenue Regulations.

Key Distinction:

CGT applies if the property is considered a capital asset.

CWT applies if the property is considered an ordinary asset (i.e., in the hands of those engaged in real estate business).

3. Documentary Stamp Tax (DST)

What it is: A tax imposed on documents, instruments, and papers evidencing the acceptance, assignment, sale, or transfer of an obligation, right, or property.
Applicable Rate: The DST on deeds of sale of real property is ₱15.00 for every ₱1,000 (or fraction thereof) of the consideration or FMV, whichever is higher.
Who Pays: By default, the parties can freely agree on who shoulders DST. Often, it is shared between buyer and seller. Some contracts stipulate that the seller pays DST along with the CGT/CWT. In other cases, the buyer pays.
Legal Basis: Title VII of the NIRC.

4. Transfer Tax (Local Government)

What it is: A tax imposed by the provincial government or city government where the property is located, required to effect the transfer of the title.
Applicable Rate: Usually up to 50% of 1% of the property’s value (but can vary depending on local ordinances). For cities or municipalities in Metro Manila, it can go up to 0.75%.
Who Pays: By convention, the buyer normally pays the transfer tax because it is one of the steps before the new owner can register the property.
Legal Basis: Section 135 of the Local Government Code (Republic Act No. 7160).

5. Registration Fees (Register of Deeds)

What it is: These fees cover the administrative cost of registering the Deed of Sale and issuing a new Transfer Certificate of Title (TCT) or Condominium Certificate of Title (CCT).
Applicable Rate: Computed based on a schedule from the Land Registration Authority (LRA). The fee increases progressively with the property value.
Who Pays: Typically, the buyer shoulders the registration fees because it is tied to securing the new title in the buyer’s name.

6. Real Property Tax (RPT)

What it is: A recurring tax levied by LGUs on real property, such as land, buildings, and other improvements.
Frequency: Usually paid annually, with discounts often offered for early or prompt payment.
Responsibility upon Sale: RPT that has accrued up to the date of sale is often the seller’s responsibility. However, parties can mutually decide otherwise. After the sale, the obligation to keep RPT current generally shifts to the buyer as the new owner.

III. Allocation of Taxes and Expenses in a Typical Transaction

While practices can vary and the parties can freely negotiate, the most common arrangement in Philippine real estate transactions is:

Seller’s Responsibilities
- Capital Gains Tax (6%) or Creditable Withholding Tax (CWT) if applicable.
- Documentary Stamp Tax (DST) – Often shouldered by the seller or shared, depending on the agreement.
- Unpaid Real Property Taxes (RPT) up to the date of the sale.
Buyer’s Responsibilities
- Transfer Tax (paid to the local government).
- Registration Fees (to the Register of Deeds).
- Notarial Fees (though in many cases, this can be split or borne by either party; it is usually part of closing costs).
- Moving Forward Real Property Taxes – The buyer pays RPT after the sale date.

Note: It is always advisable to explicitly state in the Deed of Sale (or Contract to Sell) which party pays which tax or fee, to prevent disputes.

IV. Computation Mechanics and Deadlines

Capital Gains Tax / Creditable Withholding Tax
- CGT must be filed and paid within 30 days from the date of sale (date of notarization of the Deed of Sale).
- CWT is withheld by the buyer upon payment of the purchase price and remitted to the BIR with the corresponding return.
Documentary Stamp Tax
- Must be filed and paid within 5 days after the close of the month in which the taxable document (Deed of Sale) was notarized.
Transfer Tax
- Must generally be paid before the issuance of the new title—local governments often have deadlines that coincide with the presentation of proof of payment as part of the steps to register the property.
Registration with the Register of Deeds
- After taxes have been paid (CGT/CWT and DST) and a Certificate Authorizing Registration (CAR) or BIR tax clearance is issued, the parties can proceed to the Register of Deeds to have the new title issued.
- Registration fees are generally paid at the time of registration.
Real Property Tax
- Typically paid annually on or before January 31. Some LGUs allow quarterly payments. Sellers often settle any outstanding taxes to avoid encumbrances on title.

V. Special Considerations

Contract Stipulations
- Parties can deviate from the standard allocation of taxes and fees if clearly stated in the contract. This can result in the buyer taking on the CGT, or the seller bearing the transfer tax, etc.
- Courts and the BIR usually respect contractual freedom regarding the allocation of expenses, provided the correct taxes are ultimately paid.
Properties Classified as Ordinary Assets
- If the seller (individual or corporation) is habitually engaged in real estate business, the property may be considered an ordinary asset. In such cases, the sale might be subject to CWT, VAT, or other taxes instead of CGT.
- VAT (Value-Added Tax) could apply if the sale involves properties in the ordinary course of business and the threshold for VAT is met (₱3 million in gross annual sales/receipts, subject to change by law).
Withholding Tax on the Sale of Real Property to Government
- If the buyer is the government (e.g., an LGU expropriating land), the transaction falls under specific BIR regulations that require a withholding tax on the proceeds.
Tax Treaties and Foreign Buyers/Sellers
- Foreigners buying or selling property may be affected by tax treaties that the Philippines has with their home countries, but generally these pertain to income tax and not necessarily CGT or local fees in the Philippines.
- Foreign nationals should also remember constitutional and statutory restrictions on land ownership—certain forms of ownership are restricted, with some exceptions (e.g., condominium units within 40% foreign ownership limits).
Penalties for Late Payment
- The BIR imposes surcharges, interest, and, in some cases, compromise penalties for late or deficient payment of taxes.
- LGUs may also impose penalties for late payment of transfer tax or real property tax.

VI. Step-by-Step Summary of a Typical Transaction’s Tax and Fee Payments

Draft and Notarize the Deed of Sale
- The date of notarization triggers the start of deadlines for tax filings (CGT/CWT and DST).
Compute and Pay the Required BIR Taxes
- File Capital Gains Tax or Creditable Withholding Tax returns, pay the corresponding amounts within the statutory deadlines.
- File Documentary Stamp Tax returns, pay the corresponding amount.
Obtain the Certificate Authorizing Registration (CAR)
- This certifies that all BIR taxes have been settled.
- You must submit the Deed of Sale, proof of payment, and other required documentation to the BIR.
Pay the Transfer Tax at the Local Treasurer’s Office
- Present the CAR (or other BIR clearance) and the notarized Deed of Sale to compute transfer tax.
Register with the Register of Deeds
- Pay registration fees.
- Present the CAR, official receipts for CGT/CWT, DST, transfer tax, notarized Deed of Sale, and other relevant documents.
Secure the New Title
- After payment and registration, a new Transfer Certificate of Title (TCT) or Condominium Certificate of Title (CCT) is issued in the buyer’s name.
Pay Subsequent Real Property Taxes
- The buyer, as the new owner, takes on the obligation for future RPT payments.

VII. Legal References

National Internal Revenue Code (NIRC), as amended
- Sections 24(D) (Capital Gains Tax)
- Section 196 (Documentary Stamp Tax)
- Various sections on Withholding Tax (Revenue Regulations No. 2-98, as amended)
Local Government Code (R.A. 7160)
- Section 135 (Transfer Tax)
Revenue Regulations
- BIR Revenue Regulation Nos. 2-98, 12-2018, etc. (for withholding tax, revised rules on CGT/CWT rates, etc.)
Land Registration Authority (LRA) Circulars
- For updated registration fees
Local Tax Ordinances
- Vary per municipality or city regarding Transfer Tax rates and Real Property Taxes.

VIII. Practical Tips

Due Diligence
- Verify if the seller has any outstanding real property tax (RPT) liabilities.
- Check local ordinances for the exact transfer tax rates.
- Secure the property’s tax declaration to confirm the property’s current assessed value.
Clear Agreements in the Deed of Sale
- Specify who is paying CGT/CWT, DST, Transfer Tax, and registration fees to avoid confusion.
Timely Filing
- Keep track of the short deadlines for paying CGT/CWT (30 days) and DST (before the 5th day of the succeeding month). Missing these deadlines can result in significant penalties.
Professional Assistance
- A lawyer or tax professional can streamline the process and ensure compliance with the latest rules.

IX. Conclusion

Tax and expense allocation in Philippine real estate transactions typically follows a well-established pattern wherein the seller shoulders Capital Gains Tax or Creditable Withholding Tax and, in many cases, the Documentary Stamp Tax, while the buyer pays Transfer Tax, registration fees, and subsequent real property taxes. However, the law allows flexible allocation through contract stipulations.

Staying informed about relevant BIR regulations, local ordinances, and deadlines is imperative for both parties. Proper structuring of the sale transaction, timely payment of taxes, and precise documentation ensure a smooth transfer of ownership and avoid legal and financial pitfalls.

In short, whether you are a buyer, seller, or a professional advising on a property transaction, understanding the Philippine legal framework for tax and expense allocation is vital for a secure and efficient real estate deal.