Real Property Tax 101: A Guide For Landlords
If there is one thing more difficult than paying taxes, it is understanding taxes. There’s just too many of them and then there are interest rates, penalties, surcharges, deadlines and everything else that probably put you to sleep in your taxation class. Homeowners and landlords know this all too well — you may be blessed to own a property but let’s just say the state wants to join in the fun.
As Margaret Mitchell wrote in her novel “Gone with the Wind,” there’s never a convenient time for death, childbirth, and taxes. This inconvenience is something renters don’t normally go through. In the Philippines, only property and business owners are required to pay real estate property tax or RPT. (But of course, owners turned landlords expect you to help them pay taxes with the rent.)
With the growing condo rental market in the Philippines, more and more are investing on condominiums. Condos are great investments because they are easily acquired, rented out, or sold (double the price). With flexible payment terms by developers and banks, home buyers can acquire a condo with easy-to-pay down payment, lease it out, and have the renter pay the rest of the mortgage. Taxes, however, are part of the process. Say what you want about it but as a people receiving benefits and security from the government, paying taxes is an obligation. Don’t worry, real property tax isn’t as complicated as it sounds. Below is a landlord’s guide to RPT:
What is RPT?
Just like all kinds of taxes, real property tax was imposed in the name of national progress and development. RPT is a tax paid by real property owners to the local government unit. The real property tax code of the Philippines was enacted as a way to provide additional funds to LGUs with which to underwrite basic public services. Its basis is the Local Government Code. RPT is imposed on all types of real properties including lands, buildings such as condos, and machinery. It is an annual obligation and failure to pay is a ground for the LGU to auction off the property. They will be classified under the category tax-delinquent properties. Properties under this category may be purchased at much lower prices.
Who foots the bill?
Owners and administrators are in-charge of paying the real property tax. Even if the owner decides to put up his condo for rent, he is still obliged to pay the RPT annually. In short, the renter is free of this obligation. However, the landlord may factor this in with the rent along with other dues so the renter is actually helping him pay the taxes. Of course, it is not usually discussed.
How much is RPT?
The formula for computing how much is the RPT is pretty simple: RPT = RPT rate x assessed value. What are the rates? For cities and municipalities in Metro Manila, it is 2%. For properties in provinces, it is 1%. On the other hand, the assessed value is the fair market value of the property multiplied by the assessment level or the percentage applied to the fair market value to arrive at the taxable value of the property. Limitations were established regarding these percentages to avoid abuse of authority by the LGU. Ceiling and base rates were given. For residential properties including condos for rent in the Philippines, the maximum percentage is 20% while the ceiling for commercial and industrial properties is at 50%.
In addition to the real property tax, the LGU may levy and collect an annual tax rate of 1% on the assessed value of the property. This collection is for the purposes of the Special Education Fund. Ad valorem tax of a maximum of 5% may also be imposed on idle lands.
When and where?
The RPT can be settled at the city or municipal treasurer’s office. Owners and administrators can pay the RPT in full or installment basis. If you choose to pay it all at once, the payment is due on or before January 31. If you decide to pay in tranches, you have to pay on or before the last day of each quarter and remember four important dates: On or before March 31, June 30, September 30, and December 31.
Discount and penalties
The rule in paying real property tax is simple: if you pay early, you get a discount but if you pay late, there will be penalties. Let’s start with the good stuff. If the basic RPT and additional taxes are paid in advance, the LGU may grant a discount not exceeding 20% of the annual tax due. You have to check with your LGUs because discounts usually differ per city or municipality. In Paranaque for example, if you pay in full before December 15, you get the maximum 20% discount. If you settle after December 15 but before December 31, you still get a 16% discount from the annual tax due.
Failure to pay the real property tax on time will subject owners to late payment interest rate of 2% to 72% on the unpaid amount depending on the months of delay. Maximum is up to 36 months.
How about rent to own?
Those who entered a rent to own condo scheme are usually exempted from paying the real property tax. Technically and legally, the administrator or developer of the building still owns the property. In a rent to own or lease to buy agreement, an individual is given the option to purchase a leased property within a specified period of time. Monthly rent, purchase date, and sales price are specified in the contract. Lessees pay a higher rent because part of it goes to the down payment of the property. This scheme is a win-win for buyers and sellers. Home buyers get to “test drive” the property with the option to acquire it on a more budget-friendly payment plan. Sellers, on the other hand, are able to generate income to help pay mortgages and property taxes with the possibility that the condo or home stays with him if the renter turned buyer fails to fulfill his end of the contract.
Taxes may be hard but aren’t all obligations? The trick here is to pay regularly and in advance, if possible, to avoid penalties and avail discounts. It would also help to review tax codes so you can be sure that you are paying only what is due.