Notes on Real Property Taxation and Government Appraisal

On Capital Gains Tax, Documentary Stamp Tax, Estate Tax, Donor’s Tax, and how these taxes relate to land valuation

Capital gains tax is the ordinary tax if one is engaged in real estate, particularly in the transfer of title. In a nutshell, it is under the National Internal Revenue Code Provisions, Section 39, which deals with the Capital Gains from the Sale of Real Property. It states that notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined under Section 6(E) of the Civil Code, whichever is higher, is at this moment imposed upon capital gains. This tax is presumed to be realized from the sale, exchange, or other disposition of real property in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts.

This provision is subject to discussions now in different real estate organizations. The capital gains concept in the Philippines is not the “real gains” of the property but the total consideration or buying price of the subject property. The landowner’s taxation is more than the “real” amount to be deducted in the current setup. Capital gains should be the current price minus the amount of the property when the owner bought it from the previous owner. For example, if the property was sold in 2008 for 1.5 million, selling it today by the seller at 2 million. The owner’s gain from the transaction is .5 million or Five Hundred Thousand. The latter is the gain by the owner who is selling the unit. The Php 500,000.00 should be the gain in the transaction and should be the subject of capital gains tax.

Like the principal residence or family home, presume as an exception in practice. It should be exempt from payment of capital gains tax, provided that this exemption will be satisfied only once every ten years.

Knowing the property’s principal residence or family home is essential to access the above exemption under the law. Under Art.157 of the Family Code, the actual value of the family home shall not exceed, at the time of its constitution, the amount of three hundred thousand pesos in urban areas and two hundred thousand pesos in rural areas. Or such amounts as may hereafter be fixed by law. Thus, it is essential to value the property if it exceeds or not with the definition of a family home.

In SEC. 196 of the Civil Code, Stamp tax on Deeds of Sale and Conveyances of Real Property.  On all conveyances, deeds, instruments, or writings, other than grants, patents or original certificates of adjudication issued by the Government, whereby any land, tenement, or other realty sold shall be granted, assigned, transferred or otherwise conveyed to the purchaser, or purchasers, or any other person or persons designated by such purchaser or purchasers, there shall be collected a documentary stamp tax, at the rates herein below prescribed, based on the consideration contracted to be paid for such realty or on its fair market value determined under Section 6(E) of this Code, whichever is higher: Provided, that when one of the contracting parties is the Government, the tax herein imposed shall be based on the actual consideration.

Document Stamp Tax on donations and transfer of real property in the Philippines should not exceed One thousand pesos (P1,000) and fifteen pesos (P15.00). Exceed One thousand pesos (P1,000) fifteen pesos (P15.00). When the consideration, the value received, and a contract is paid for such realty after making proper allowance of any encumbrance.

Under Section 84 of the civil code, Estate Tax states that there shall be levied, assessed, collected, and paid upon the transfer of the net estate as determined under Sections 85 and 86 of every decedent, whether resident or nonresident of the Philippines. Under the Republic Act No.10963, there shall be an imposed rate of six percent (6%) based on the value of such NET ESTATE determined as of the time of death of decedent composed of all properties, real or personal, tangible or intangible less allowable deductions. The computation of the Net Estate is essential to know its value. Deducting from the Gross Estate are the deductions allowed to the estate or citizen or a Resident such as expenses, losses, indebtedness, and taxes.

The valuation of the Gross estate or properties is essential in determining the total amount subject to deduction. However, the Family Home should not exceed the value of One million pesos (Php 1,000,000); the excess will be subject to estate tax. As a requirement for the exemption or deduction, the said family home must have been the decedent’s family home as certified by the barangay chairman.

In Donor’s Tax, there shall be levied, assessed, collected, and paid upon the transfer by any person, resident or nonresident, of the property by gift. The Train Law (Republic Act No. 10963) shall not consider the relationship between the donor and the donee(s). The law does not distinguish donations made to relatives or gifts made to strangers. The tax payable by the donor shall be six percent (6%).

SEC. 102. Valuation of Gifts Made in Property. – If the gift is made in property, the fair market value thereof at the time of the gift shall be considered the amount of the gift. In the case of real property, the provisions of Section 88(B) shall apply to the valuation thereof.

The relevance of this provision is essential in valuation. Under Sec. 88 (b) of the same law, the estate shall be appraised at its fair market value at the time of death. However, the appraised value of the real property as of the time of death shall be higher of either the fair market value as determined by the Commissioner; or the fair market value as shown in the schedule of values fixed by the Provincial and City Assessors.

Thus, in determining the fair market value, an appraiser must be knowledgeable in these provisions of the law. The more if the parties involved had acquired the appraiser’s services for court litigation or appointed an appraiser as Commissioner or an expert witness in a court proceeding.

On Real Property Tax, Transfer Tax, Idle Lands Tax, Special Levy and its relation to land valuation

Under Section 217 of the Civil Code, the actual use of the real property is the basis for assessment. Real property shall be classified, valued, and assessed based on its actual use regardless of where located, whoever owns it, and whoever uses it.

Also, under Section 218, there should be assessment levels applied to the fair market value of real property to determine its assessed value. This assessment should be fixed by ordinances of the Sangguniang Panlalawigan, Sangguniang Panlungsod, or Sangguniang bayan of a municipality within the Metropolitan Manila Area.

This provision of law is the target of debate in the house of Congress during the deliberation of the Valuation Reform Act. The power of the Sanggunian to fix the assessment value of the property. The common problem in the non-implementation of the revision of the assessed value is the hesitation and rejection of the local government executives to minimize the backlash of its constituents.

In Sec. 135, the provision on a tax of the Transfer of Real Property Ownership. – (a) The province may impose a tax on the sale, donation, barter, or on any other mode of transferring ownership or title of real property at the rate of not more than fifty percent (50%) of one percent (1%) of the total consideration involved in the acquisition of the property or the fair market value in case the monetary consideration involved in the transfer is not substantial, whichever is higher—the sale, transfer, or other disposition of real property according to R.A. No. 6657 or the Comprehensive Agrarian Reform Law shall be exempt from this tax.

Section 240. Special Levy by Local Government Units- shall not exceed sixty percent (60%) of the actual cost of such projects and improvements, including the costs of acquiring land and such other real property. The special levy shall not apply to lands exempt from basic real property tax.

Under Sec.236, a province or city, or municipality within the Metropolitan Manila Area, may levy an annual tax on idle lands at the rate not exceeding five percent (5%) of the assessed value of the property, which shall be in addition to the basic real property tax.

As provided under Section 201 of the Civil Code, the appraisal of real property, whether taxable or exempt, shall be appraised at the current fair market value prevailing in the locality. Thus, the appraiser or the assessor needs to know these laws to determine the amount to deduct or be exempted in the taxation.

References for Valuation of Property for Other Purposes 

Creation of Appraisal Committee

Under Executive Order No. 132, s. 1937, as amended, there should be an appraisal committee on each province and city and municipality within Metro Manila. The composition includes the Provincial Engineer, Public Works Engineer or Highways District Engineer, Assessor, or Treasurer.

National government agencies and other instrumentalities also have their internal appraisers. They may create their appraisal committee depending on the nature of their agency and the specific mandated functions and authorities.

The creation of which is essential in the government acquisition and the valuation of the properties. Most of the time, the court will pick from them to represent their offices which is crucial in determining the value of properties subject to litigation.

Acquisition of property by the Government and its agencies are always subject to conservative estimates of the property. In the Road-right-of-way Act, the affected houses and properties in the widening of roads and highways are always subject to the just compensation in which market value should be the basis. However, in most cases, like what happened in one of my clients in Lapulapu City, we were asked to accept the city’s offer for a payment based on the amount declared in the tax declaration of the owner. The said amount is far too low for the market value of the property in the area.

Under the provision of R.A. No.9700 or the Comprehensive Agrarian Reform Program Expanded is based on the amount determined per the criteria provided for in Section 7 of the said law and existing guidelines on land valuation; or and the value based on the order of the Department of Agrarian Reform Adjudication Board (DARAB) or the regular court, which has become final and executory. This law should align with the Philippine Valuation Standard, not depart from its provision on the determination of market value, not otherwise.

The specific provisions of Section 13 of R.A. No. 7279 is as follows:

“Sec. 13. Valuation of Lands for Socialized Housing.- Equitable land valuation guidelines for socialized housing shall be set by the Department of Finance on the basis of the market value reflected in the Zonal valuation, or its absence, on the latest real property tax declaration.

For the site already occupied by qualified Program beneficiaries, the Department of Finance shall factor into the valuation the blighted status of the lands as certified by the local government unit or the National Housing Authority. For this purpose, the DOF issued Local Finance Circular No. 3-92, as amended by Local Finance Circular No. 1-97, which provides the determination of the market values of blighted lands. Computed primarily based on the land market value determined based on the zonal values shown in the approved zonal valuation of real properties for the area or locality applicable to the corresponding period, shall be used as the basis for computing the fair market value of the subject land.

These provisions of the law should be amended because the occupants or the property owner are at a loss; using zonal valuation or assessment value in determining the property’s market value is wrong. It is clear under the law that zonal valuation and assessment value are for tax purposes only. The usage of zonal valuation and assessment value will not be an issue if the two are updated regularly. However, in the current situation, there is a zonal value updated in 1996. If this value will determine the property’s value, it is equivalent to land-grabbing by paying way below the market value.

Valuations of Private Lands for Acquisition by the Government

Valuation of private land for the acquisition of the national Government for road right-of-way (RROW), governs by Sections 5, 6, and 7 of R.A. No. 10752, an Act Facilitating the Acquisition of Right-of-Way Site or Location for National Government Infrastructure Projects, and its implementing

rules and regulations.

Valuation of private lands for the acquisition of local governments shall be through the power of Eminent Domain as provided in Section 19 of R.A. No. 7160. Local governments may adopt the prescribed procedures in Sections 5, 6, and 7 of R.A. No. 10752. Otherwise, they shall be guided by Executive Order No. 132, series of 1937, as amended, which provides the procedures to acquire private property for public use and create appraisal committees.

Appraisal of Public Lands and Other Patrimonial Property

Under the law, Patrimonial Property is the property of the State-owned by it in its private or proprietary capacity, i.e., the property not intended for public use, some public service, or the development of national wealth.

The specific provisions of Section 3 of the Department of Environment and Natural Resources (DENR) Administrative Order (A.O.) No. 98-20 states that in conducting the appraisal or re-appraisal, the fair market value of the property shall, as much as possible, be ascertained by considering the following factors, to wit:

1. a) Extent, classification, location, actual use, and development trends of the area;
2. b) Assessed value and BIR zonal valuation;
3. c) Sales and holding prices of lands of similar character located in the area;
4. d) Highest and best use or potential of the property;
5. e) The purpose for which the property is to be disposed of; and
6. f) other relevant factors or circumstances.

Here it is clear that the disposal of government property should consider the factors stated above. Assessed value and zonal valuation are only one of the many factors that need to be considered in determining the property’s value for disposal.

Under the pertinent laws, proclamations, or any other presidential issuances, the appraised or re-appraised value of the property classified as residential or agricultural or primarily used for institutional or recreational purposes, be less than the current assessed value thereof. If the property classification is commercial or industrial, the appraised or re-appraised value shall be not less than the average of the evaluated and zonal values thereof.

If the property has not yet been declared for taxation purposes or its assessed value is not available, it shall use another property located in an area similar to that of the appraised property. Application of fair market value or the current selling price of properties of similar nature in the area as determined by the Assessor’s Office concerned if the zonal value is not available. The preceding, notwithstanding, part or parts not exceeding thirty percent (30%) of its total area, of industrial or commercial land covered by lease application or contract, which are devoted to and utilized to grow trees, shall be appraised or re-appraised at zero value.

In the Philippine Valuation Standards, Valuation for Tax Purposes, it is apparent that the Commissioner of the BIR can prescribe absolute property values under Section 4 of the Tax Reform for Acceleration and Inclusion (TRAIN) or R.A. No. 10963, which amended Section 6(E) of the National Internal Revenue Code (NIRC), states Section 4. Section 6 of the NRC, as amended, is a result of this further amended to read as follows: “Sec. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement (Emphasis ours).

Under PVS GN 100 on Mass Appraisal for Property Taxation, zonal values of real properties are more or less approximate to the present market values of real properties. It is also the basis for computing the property’s capital gains tax, documentary stamp tax, estate tax when sold or transferred.

Zonal valuation should be used, and factors need to consider for land acquisition of either socialized housing or private lands. There should be fairness in the process of purchase and disposition. The Government uses different methods or statutory valuations guided or determined by law, not by the international valuation standards that are the heart of Philippine Valuation Standards.

Zonal and Land Use Planning

Section 2 of Chapter VIII clearly states that zonal valuation is for revenue/tax purposes. It is separate from the acquisition and disposition of properties.

In the history of its evolution, real property valuation for the national gains tax, income tax, and transfer tax on the valuation done at the local Government for its annual real property tax collection. This local government valuation of real property uses only a fraction of the market value as the basis for computing the tax due from each actual property owner. The land valuation procedure approximates the current market value base on the guiding principles of taxation.

The Government’s zonal value is a value for internal revenue tax purposes derived from a diversified valuation procedure adopted by the committees or recommending body. The zonal values take effect after approval by the Secretary of Finance. These zonal values remain in force until the subsequent revision/amendment.

The zones or areas defined by the Commissioner of the Bureau of Internal Revenue (BIR) under section 6(E) of the National Internal Revenue Code (NIRC) of 1997 is different from the zones defined by the Housing and Land Use Regulatory Board, now under Department of Housing Settlement and Urban Development, as an area within a city or municipality for specific land use as defined by artificial or natural boundaries.

Furthermore, section 20 (c) of the Local Government Code (LGC) and Article 41 of its Implementing Rules and Regulations (IRR) provides that “the local government units shall, in conformity with existing laws, will continue to prepare their respective comprehensive land use plans enacted through zoning ordinances. These plans shall be the primary and dominant bases for the future use of land resources and shall consider requirements for food production, human settlement, and industrial expansion. The comprehensive land-use plan shall also be the basis for the “reclassification of agricultural lands.”

Conversion of Agricultural Lands to Non-Agricultural Uses. The Department of Agrarian Reforms (DAR) is mandated to approve or disapprove applications for conversion, restructuring, or readjusting agricultural lands into non-agricultural uses under Section 4 (j) of E.O. No. 129-A, series of 1987. It is vested with the exclusive authority to approve or disapprove applications for conversion of agricultural lands for residential, commercial, industrial, and other land uses. Action on applications for land use conversion on individual landholding shall remain the responsibility of the DAR, which shall utilize documents on the comprehensive land use plans and accompanying ordinances passed upon and approved by the local government units concerned, together with the National Land Use Policy under R.A. No. 6657 and E.O. No. 129-A.

It is apparent in the Manual of Real Property Appraisal and Assessment Organization that the Assessors have responsibilities in Land Use Planning. Even though the City or Municipal Planning and Development Office has the primary responsibility, the Municipal assessor will provide the maps, classification, and actual use of real properties in the municipality. The MPDO submits its CLUP to the Provincial Planning and Development Office (PPDO) for review and approval. It is also clear that the zonal valuation is different from the zoning map done by the MPDO and CPDO, which is for determining the property’s land use and not for taxation.

On Plant, Machinery, and Equipment

The appraisal and assessment of machinery for real property tax purposes under Section 224 of the R.A. No. 7160 that there are different situations upon which the appraiser or assessor can value different property types. The other kind of machinery can be group as follows; If the property is brand new; imported; newly acquired machinery; and machinery that is a plant, machinery of Renewal Energy. Thus, an appraiser should determine first the type of property before the actual valuation process to arrive at a credible and reliable valuation.

Machinery as real property for purposes of real property taxation is subject to assessment for the annual levy. Interpreting the definition of machinery is complex. Thus an assessor and appraiser should know the law and the latest supreme court jurisprudence to conduct a reliable appraisal.

Contrary to prevalent norms in valuation practice, machinery estimation of value includes installation and support facilities for processing manufacturing products, from raw materials to finished products. The most commonly used approaches in machinery and equipment are market data and cost approach. As discussed, to arrive at a cost estimate, we have to consider the direct and indirect costs in computing the value of the machinery and equipment.

Cost of production of the machinery and equipment includes other cost elements such as cost of the primary machine, ancillary or optional accessories, freight from source to the site, insurance, bank charges, documentation, brokerage, customs duties, etc.

In the case of machinery from abroad, the market value is based on its acquisition cost. The actual cost to the owner when the same is not yet depreciated or appraised from its purchase, including the cost of freight, insurance bank, and other charges, brokerage, arrastre and handling, duties, and taxes. The price in a foreign currency will convert into a peso as the Bangko Sentral ng Pilipinas fixed the transaction.

Under Section 225 of the Local Government Code, the depreciation allowance for machinery shall be made at a rate not exceeding five (5) percent of its original cost for its year of use. And shall fix the remaining value for machinery at not less than twenty (20%) of such original, replacement, or reproduction cost new. Unlike in private practice, wherein the value of machinery and equipment is on its market value less than its actual depreciation.

We have just completed the appraisal of a chemical plant in Cebu. I found out that most of the equipment and machinery were in the plant since the 1970s but are still in operation. I was just wondering how repair and rehabilitation could maintain and prolong its existence. In that appraisal assignment, our in-house mechanical engineer is doing the inspection and appraisal of the equipment. The mechanical engineer explains it has the expertise and legal basis in the appraisal of machinery and equipment. This process also aligns with Republic Act No. 8495, requiring all machinery and equipment appraisals to be supervised and signed by a professional mechanical engineer. However, assessors are allowed to appraise machinery and equipment for taxation purposes under the Local Government Code.

We have to follow the client’s business classification being export-oriented. The equipment was all confidential. We should guard our Intellectual Property Rights, and due to confidentiality, we did not take photographs. In a typical appraisal, it should not be the case.

In conclusion, the role of the assessor and appraiser in land valuation is not an easy task. They have to be knowledgeable and conversant in different land laws, have an in-depth knowledge of the Philippine Valuation Standards and Mass Appraisal Guidebook, and the updates on Supreme Court decisions that form part of the law of the land.