Do Nothing and Earn

A parrot enthusiast just came inside a pet shop and was fascinated by the three lovely and colourful parrots dangling in their respective cages.

“How much for the parrot on the left?” he enthusiastically asked the pet shop owner.

“Seventy-five thousand pesos,” was the fast reply.

“Wow!  It’s so expensive!  What does it do?”

“That parrot can make an accounting of your expenses and revenues.”

“My goodness! That’s quite something.”  Still scratching his head in disbelief, the customer asked again, “How about the parrot on the right?”

“That will be one hundred thousand pesos.”

“What?!?... seventy-five... now... one hundred... Good Lord! What does it do?

“That parrot can make a comprehensive feasibility study.”

“Wow, that’s amazing... unbelievable!”  Scratching his head again, the incredulous customer now points to the last parrot, “How about the parrot in the middle?

“That will be two hundred fifty thousand pesos.”

“What!!!?... seventy five ... one hundred ... and now ... two hundred fifty???! What does it do?”

“Well, it does nothing.”

“Nothing?  And you want me to pay two hundred fifty thousand pesos?”

“Yes, that parrot is the Boss of the two parrots!”

I heard this story while attending a productivity seminar for private employees.  Funny but I think this has strong parallelism to the passive income from real estate assets.  Both earns while doing nothing.

The normal tendency of real properties is to appreciate in value; some slowly while others shoot up  dramatically depending on the circumstances.  One thing’s sure though.  They seldom go down in value.  The increment or the positive difference in value is a revenue and in other cases, where the asset contributes a recurring inflow of cash like rentals from apartments or condominium units, is a passive income generator.

While the concept of doing nothing and still earn is something very enticing, the truth of the matter is it is never a reality.  The boss gets paid higher because he not only is held accountable for the outcome of the jobs of his two staff but also is responsible for making sure that the goals of the organization are achieved.  In real estate, the passive income is actually the result of the cash inflow being greater than the cash outflow.  In running an apartment business, it is not just about the rental income but also keeping the fixed overhead low like salary of the collector and the maintenance crew and the annual real estate taxes. And also to consider capital costs like major repairs and maintenance of the units.

Do nothing and you lose everything.

Taxes on Transfer of Ownership

In this world, nothing can be said to be certain, except death and taxes.

-        Benjamin Franklin -

It is fascinating to know that not too many of us care about knowing how taxes are computed.  Sure we know that there are taxes to be paid  and that many things that we do have been prepaid in taxes – meaning taxes are paid even before we can enjoy the item or the service.  A basic example is when you buy groceries where a value added tax (VAT) is inputted in the price of the items bought or when you ride a public utility vehicle where fare includes road tax or when you fly any of the airlines where fare includes travel tax or when you watch movies where tickets include the amusement tax.  And the most heartbreaking of all, when you receive your salary net of withholding taxes.

There are other taxes though which are paid after the transaction happens.  You can delay the payment of the taxes but the need to pay would eventually catch up and you will be left with no choice but to pay the taxes or be charged with ridiculous penalties by the Bureau of Internal Revenue.  These taxes are not common and may happen only maybe once or twice in your lifetime if you are an end-user or many times over if you are a regular investor.  I am referring to Capital Gains Tax and the other taxes that go with the transaction of selling your real estate property and transferring the ownership of the said property.

Hereunder are the list of basic real estate taxes that must be paid to effect a transfer of ownership over a real estate property like a house and lot, lot only or a condominium unit:

1. Capital Gains Tax – If the property is classified as Capital Asset. For firms, a capital asset is an asset that has a useful life longer than one year and is not intended for sale during the normal course of business. For individuals, capital asset typically refers to anything the individual owns for personal or investment purposes. Usually, Capital Gains Tax is for the Seller's account. The rate is at 6% of the selling price or zonal value, whichever is higher. To be paid to the Bureau of Internal Revenue, 30 days after notarization of the Deed of Absolute Sale or receipt of payment, whichever is earlier.

 2. Creditable Withholding Tax - If the property is classified as Ordinary Asset. Usually, this is for the Seller's account. If the Seller is not habitually engaged in selling properties, the rate is fixed at 6% of the selling price or zonal value or market value (tax declarations), whichever is higher. If the seller is habitually engaged in selling properties, the following matrix will be followed: Not over P500,000 at 1.5% of the selling price, zonal value or market value (tax declarations); Over P500,000 to P2M at 3%; Over P2M at 5%. To be paid to the Bureau of Internal Revenue on or before the 10th day of the following month after the notarization of the Deed of Absolute Sale ore receipt of payment, whichever is earlier.

 3. Documentary Stamp Tax - Usually, this is for the Buyer's account. The rate is 1.5% of the selling price, zonal value or market value (tax declarations) , whichever is higher. To be paid to the Bureau of Internal Revenue on or before the 5th day of the following month after the notarization of the Deed of Absolute Sale or receipt of payment, whichever is earlier.

 4. Transfer Tax - Usually, this is for the Buyer's account. The prescribed rate is .5% of the selling price, zonal value or market value (tax declarations), which every is higher. However, rate may differ depending on the local ordinances of the local government unit. To be paid to the City/Municipal Treasurer's Office on or before the 60th day after notarization of the Deed of Absolute Sale.

  

5. Registration Fee - Usually, this is for the Buyer's account. The rate is based on schedule per local Registry of Deeds. To be paid to the Registry of Deeds on upon entry of required documents.

 6. Value Added Tax -The rate is 12% of the selling price. To be paid to the Bureau of Internal Revenue. Properties classified as capital asset is exempted from VAT. Properties classified as ordinary asset but priced not higher than P1,915,500 for lot only or not higher than P3,199,200 for houses and lots are also exempted from VAT. Percentage tax of 3% might be imposed on VAT exempted transactions.

There are a lot of other taxes and if you’re a sophisticated man, you’d better hire a tax consultant.  It’s good to know which ones you can reduce or which ones you can delay. Avoiding or evading taxes...? hmmmn... I don’t think so.  As surely as death will come, the tax man’s gonna knock on your door, sooner or later, whether you're dead or alive.

Real Estate is Growing Strong

The Ortigas Center

The real estate industry is still booming.  Recent reports from economic briefings state the need for more housing structures, vertical and horizontal.  While there has been a dramatic increase in real estate industry players, the market growth for condominium and subdivision end-users has been robust for the past seven years.  The packaging of the housing portfolios from developers with tie ups with universal banks have been very helpful in keeping the demand high and steady.

The widening of major avenues in the periphery of the metropolis has been instrumental in pushing the demand for construction of more RFO houses.  The Manila East Road begins where Ortigas Extension ends and the development of subdivisions further east of the metropolis is very visible along this stretch of free highway, one of the two remaining "toll-free" major thoroughfares just outside of Metro Manila.  Angono, Taytay and the Binangonan area are now the hotbed of sales and marketing professionals.  As the saying goes, "bees go where the honey is."

This growing confidence in the real estate sector can be attributed also to the professionalization of the real estate selling practice. Since its effectivity in 2009, RESA Law has planted the seed of accountability, responsibility, fairness and professionalism in most of the marketing practitioners.  While there are still others who work underground and incognito, real estate practice has been improving and the prestige of the profession has grown tremendously.  This year might be the last year where graduates of other courses can take the board exam for Licensed Real Estate Brokers.  The Real Estate Brokers course will now produce its first ever graduates from reputable colleges and universities.

The first semester of 2014 has shown remarkable visible construction progress all over the country, most notable of which is the completion of the Philippine Arena in Bocaue, Bulacan.  While this mammoth world class project got nothing to do with any of the top real estate developers of the country, it nevertheless set a new standard on what this nation can accomplish and deliver.  The rippling effect of progress is being stirred by the sheer buzz that it created around the world.  The ripples will surely come in waves.

Just hope that wave doesn't turn into a tsunami.