It is not uncommon to be asked what parents can do to save on taxes when they transfer real property to their children. There are 3 options: a) donating them, b) selling them, 3) converting them into shares of stock and transferring the shares, to their children.
Choice c) is best made when there are several properties involved and when the parent still wants control over the properties. Although a property for shares transaction is tax-free, taxes shall be imposed once the shares are transferred to the children (but they will be lower than taxes applicable to donation or sale of property). Plus. there are compliance requirements that have to be factored in, like the periodic filings with the SEC and the BIR.
If there are only a few properties involved and the parent deems it best to already dispose of them amongst the children (provided they are already of legal age), the better alternatives are donation or sale. The taxes payable as regards the donation or sale of real property depend on the value of the property involved. Note that since the property is now vested in the names of the children, they can do whatever they want with the property. If they are already married, sometimes this lead to some difficulties for the donor-parents. This is particularly so if the donees are governed by the absolute community of property regime (meaning, the wife becomes co-owner of the property) as is usually the case if they were married under the Family Code.
Consider: if the donor-parent already transfers the property where he is residing and intends to reside until his death, then he no longer has control over it once he loses ownership of it. What if the child/children mortgage the property and lose it? Parents may want to make it easy for their children once they die but they have to be practical in their own favor too while they are still alive.
Tax payable by donor of real property
Under Sec. 99 of the Tax Code, the tax shall be computed in accordance with the following schedule:
If the gift is valued:
| Over | But Not Over | The Tax Shall be | Plus | Of the Excess Over |
| | P 100,000 | Exempt | | |
| P 100,000 | 200,000 | 0 | 2% | P100,000 |
| 200,000 | 500,000 | 2,000 | 4% | 200,000 |
| 500,000 | 1,000,000 | 14,000 | 6% | 500,000 |
| 1,000,000 | 3,000,000 | 44,000 | 8% | 1,000,000 |
| 3,000,000 | 5,000,000 | 204,000 | 10% | 3,000,000 |
| 5,000,000 | 10,000,000 | 404,000 | 12% | 5,000,000 |
| 10,000,000 | | 1,004,000 | 15% | 10,000,000 |
A donor has to make sure, however, that the donations do not prejudice the legitime of the other heirs.
Capital Gains Tax on Sale of Real Property
Under Sec 24 D), a final tax of 6% based on the gross selling price or current fair market value or the property, whichever is higher, shall be imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines.
Estate (Inheritance) Tax
Of course, if you don’t care much about your children, you can either donate everything to the government tax-free or, still leave everything to your children but let them pay for the more oppressive estate taxes under Sec. 84 -
If the net estate is:
| Over | But Not Over | The Tax shall be | Plus | Of the Excess Over |
| | P 200,000 | Exempt | | |
| P 200,000 | 550,000 | 0 | 5% | P 200,000 |
| 500,000 | 2,000,000 | P 15,000 | 8% | 500,000 |
| 2,000,000 | 5,000,000 | 135,000 | 11% | 2,000,000 |
| 5,000,000 | 10,000,000 | 465,000 | 15% | 5,000,000 |
| 10,000,000 | And Over | 1,215,000 | 20% | 10,000,000 |
Why think of these things? As they say, you can’t take it with you when you go, so you might as well plan for it.
6 comments:
Wow this such a great article and the tips are very comprehensive. For sure many entrepreneurs with small and big businesses are going to benefit from this. Keep it up!
Orange county homes
Great article. This is really informative. I have read an article entitled "Critical Estate Documents" a while ago. It talks about estate planning as well. It is really a must for everyone to protect their families and their assets.
Hi,
Thanks for your article. But I have a few questions. How can a parent retain control if they have already transferred the shares of stocks to the children? (scenario C)
And what's your take on the common problems with co-ownership? How can a parent help the children avoid this once they're gone? (I.e. Diasgreement on what to do with a property, who gets what, etc.)
Hi Anonymous,
In the case of the property-for-cash scenario, the parents can retain 2/3 ownership of the company to be able to control the corporation. Please note that nowadays the BIR does not seem inclined to issue rulings confirming that this is a tax-free exchange.
In the co-ownership, a contract of co-ownership can be made where the parents can set their terms and conditions.
Thanks,
TLI
This is the exact article that I am looking for because my mother and her siblings are having a tough time dividing their inheritances from my deceased grandpa. Thank you so much!
Hi,
Though I have nothing against co-ownership. I do believe it's healthy to have a balanced view of the real potential for co-owners to have problems in managing co-owned properties, regardless of what contract was setup.
One relates article I found online is this http://www.balita.ca/2009/09/16/problems-in-co-ownership/
Also, regarding the property-to-shares scenario, I think there may be two issues here. First, BIR only allows tax-free conversion of properies to shares if the owners, after the transfer, gain majority ownership, that is at least 51%. Hence, parents cannot keep 2/3 if they want tax-free conversion.
And also, the 2nd problem that arises from this scenario is that whether parents do keep control (2/3) or not (49%), it is that whatever ownership they have left will be subject to eatate taxes, as their shares form part of their gross taxable estate.
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