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Last Updated on March 1, 2022 by Lamudi
Renting out property is a great way to make money from real estate. It is important to know the tax levied on this income to keep your business going.
Along with the steady increase in land values, recurring income is one of the key benefits of investing in real estate. Pinnacle CEO and Managing Director Michael Mabutol, as quoted in an interview for Lamudi’s2015 Real Estate Report, says, “Philippine real estate’s next big opportunity is to produce income-generating assets” and that “the next big buzzword for local real estate is recurring income.” This great potential, however, comes with the responsibility of paying rental income tax in the Philippines.
Like any business endeavor, there are taxes associated with leasing or renting out a property. To avoid missing or miscalculating payments (and hefty fines in the process), a basic understanding of the income tax rate imposed on your rental properties is very important.
What is Rental Income Tax?
Rental income tax is the tax charged when properties or equipment are leased in the Philippines. Despite the fact that rental properties fall under the category of a business, rental income tax is applied in place of sales tax because no transactions were made. Instead of being a sales tax, the rental income tax is more equivalent to an income tax because leasing services are now considered an extra source of income. The lessor or landlord often collects it as part of the rent payments made throughout the lease term.
Should You Pay Rental Income Tax?
Like other taxes, there are provisions that make an owner of a rental property or lessor subject to rental income tax. You’re obliged to pay when:
- The gross rental income earned by the lessor/rental property owner and his or her spouse from a property is at least $1,500 or less than Php64,000 per month.
- The rental property is directly owned by the lessor or jointly with his or her spouse.
- The property owners are earning no other type of local income.
- There is no existing mortgage (i.e., no loan is taken for the purchase of the property).
To calculate the pre-tax profit figure, you have to determine the gross rental income and deduct the expenses and capital allowances from it. The deduction can be between 40 to 90 percent of the total gross income.
This can be established via a standard percentage or actual incurred costs—the latter is more common. This includes repairs, maintenance, depreciation, taxes, licenses, local business tax, mayor’s permit, andreal property tax.
Learn More About Gross Income
Gross income refers to the earnings derived from any source such as but not limited to:
- Gains from dealings in property
- Rentals
- Interest
- Gains from the conduct of trade or business
- Gains from the exercise of a profession
- Compensation for services including fees such as commissions, wages, salaries, and more
- Royalties
- Annuities
- Dividends
- Pensions
- Prizes and winnings
- Partner’s distributive share from the net income of partnerships
As clearly stated in the description of gross income, earnings from rentals are considered a source of income, so rental income tax is applied.
What are the Requirements When Paying Rental Income Tax?
When paying for your rental income tax, you will need BIR Form 1701. Aside from the Rental Income Tax form, you will also need the following:
- BIR Form 2304 – Certificate of Income Payments not Subjected to Withholding Tax, if applicable
- BIR Form 2316 – Certificate of Income Tax Withheld on Compensation, if applicable
- Waiver of the Husband’s right to claim additional exemption, if applicable
- Income Tax Return previously filed and proof of payment, if filing an amended return for the same year
- Account Information Form (AIF) or the Certificate of the independent CPA with Audited Financial Statements, if the gross quarterly earnings, output, sales, or receipts exceed P 150,000.00
- BIR Form 2307 – Certificate of Creditable Tax Withheld at Source, if applicable
- Proof of prior year’s excess tax credits, if applicable
- Proof of Foreign Tax Credits, if applicable
- Duly approved Tax Debit Memo, if applicable
When to File Rental Income Tax
Rental income tax in the Philippines falls under annual income tax for self-employed individuals, estates, and trusts (including those with mixed-income sources, i.e., compensation income and income from business and/or practice of profession). This is why it’s filed under BIR Form 1701.
The final Adjustment Return or Annual Income Tax Return must be filed on or before the 15th day of April of each year, covering income for the preceding year.
What about Value Added Tax?
Aside from Rental Income Tax, lessors also have to deal with value-added tax (VAT). Leasing a property is categorized as a service, making it subject to VAT. In particular, properties in the Philippines with rental payments exceeding Php12,800 ($272) per month received by landlords whose gross rental income per year exceeds Php1,919,500 ($40,840) are subject to 12 percent VAT. The tenants generally shoulder the VAT burden, but for calculation purposes, it is added to the landlord’s tax liability.
However, like anything imposed with VAT, rental income can be subject to a number of exemptions. According to the Bureau of Internal Revenue (BIR), these exemptions include the following:
- Properties with rental payments below Php12,800 ($272) per month
- Properties with rental payments exceeding Php12,800 ($272) per month received by landlords whose gross rental income per year is less than Php1,919,500 ($40,840) are not subject to VAT but are instead liable for percentage tax at a flat rate of 3 percent levied on the gross rent.
Withholding Tax on Rental Income Philippines
Withholding tax happens when a company withholds a percentage of the payment for goods or services from a supplier and remits that portion to the government on the provider’s behalf. Governments use this tax compliance approach to ensure that businesses duly and promptly remit taxes.
In other words, the government transfers the BIR’s tax collection responsibility to the private sector.
In general, you must withhold 1% of the value of payments for purchases of products and 2% of the value of payments for purchases of services from all local suppliers if you are a tax withholding agent. A tax withholding agent must also withhold tax from non-resident aliens conducting trade or business in the Philippines.
How can you tell whether your company has been named a Tax Withholding Agent (TWA)?
There are two ways to determine whether your company has been named a TWA:
The new TWAs will be listed in a Revenue Memorandum Circular that the BIR will issue, and that must be published in a publication with wide distribution. Additionally, it will be posted on the BIR website. A corporation is regarded as having received notice that it is a TWA as of the publication date. As a result, a firm should often check the daily newspapers and the BIR website.
The BIR may also notify a company in writing through a letter. Though it is possible that a firm won’t get the letter on time or at all, be sure to read the newspaper and check BIR’s website occasionally.
2023 Withholding Tax Changes Following the TRAIN Law
Professional Fees
Previously, taxes were levied at 8% for individuals and 10% or 15% for non-individuals on all (a) professional fees, talent fees for services rendered, (b) income paid to specific brokers and agents, and (c) commissions of independent and/or exclusive sales representatives and marketing agents of companies. The tax rate is now determined by those people’s gross income for the most recent tax year.
Proposed Income Tax Reform for 2023
Being aware of thereal property tax deadline for 2023and proposed tax reforms is important, especially if you are planning to invest in a property and turn it into a rental business. Tax reforms can affect rental rates due to Value Added Tax (VAT) that the renter and the Rental Income Tax usually shoulder. To make sure that you can profit from your rental business, it is important to check the latest proposed tax reforms to determine whether or not you need to raise the rental rates.
The Tax Reform for Acceleration and Inclusion (TRAIN) Act provides for future personal income tax rate reductions to take effect on January 1, 2023, the Philippines Department of Finance recently reminded taxpayers in a release (Republic Act No. 10963). The TRAIN Act, which was adopted in 2017, called for a decrease in personal income tax rates beginning on January 1, 2018, and another decrease beginning on January 1, 2023, in the following ways:
- 0% up to PHP 250,000
- PHP 250,000 to PHP 400,000 – 15%
- PHP 400,000 to PHP 800,000 – 20%
- between PHP 800,000 and PHP 2,000,000 – 25%
- from PHP 2 million to PHP 8 million – 30%
- More than PHP 8 million (35%)
The four middle brackets are where the rate decreases are made. The top rate (35%) and bracket barrier remain in place.
Main image via Shutterstock
As an expert in taxation and real estate, I can provide valuable insights into the concepts covered in the article about Rental Income Tax in the Philippines. My extensive knowledge in this field allows me to break down the key components discussed in the article and offer a deeper understanding of each concept.
1. Rental Income Tax Overview:
- Definition: Rental income tax in the Philippines is a tax imposed when properties or equipment are leased. Unlike sales tax, it functions as an income tax because it involves no direct transactions. Lessor or landlords typically collect it as part of the rent payments.
2. Who Should Pay Rental Income Tax:
- Criteria: Owners of rental properties are obligated to pay rental income tax under specific conditions, such as:
- Gross rental income is at least $1,500 or less than Php64,000 per month.
- The property is directly owned by the lessor or jointly with their spouse.
- No other local income is earned.
- No existing mortgage on the property.
3. Calculation of Rental Income Tax:
- Pre-Tax Profit: Gross rental income minus expenses and capital allowances, with deductions ranging from 40% to 90% of the total gross income. Deductible expenses include repairs, maintenance, depreciation, taxes, licenses, local business tax, mayor’s permit, and real property tax.
4. Gross Income and Its Components:
- Definition: Gross income encompasses earnings from various sources, including rentals, gains from property dealings, interest, trade or business, profession, compensation, royalties, annuities, dividends, pensions, prizes, and winnings.
5. Requirements for Paying Rental Income Tax:
- Documents: BIR Form 1701 is essential. Additional requirements may include BIR Form 2304, BIR Form 2316, waiver of the husband’s right to claim additional exemption, income tax return, Account Information Form (AIF), BIR Form 2307, and others based on specific situations.
6. Filing Deadline for Rental Income Tax:
- Timeline: Rental income tax falls under the annual income tax for self-employed individuals, estates, and trusts. The filing deadline is on or before April 15th of each year, covering the income for the preceding year.
7. Value Added Tax (VAT):
- Applicability: Leasing a property is subject to VAT, especially if rental payments exceed Php12,800 per month. Exemptions exist for properties with lower rental payments and landlords with gross rental income below Php1,919,500 per year.
8. Withholding Tax on Rental Income:
- Definition: Withholding tax involves deducting a percentage of payment for goods or services and remitting it to the government. In the Philippines, withholding tax is applied to purchases of products and services, and a company may be designated as a Tax Withholding Agent (TWA).
9. 2023 Withholding Tax Changes Following the TRAIN Law:
- Changes: The article mentions changes in withholding tax rates for professional fees, which are now determined by the gross income of individuals or non-individuals for the most recent tax year.
10. Proposed Income Tax Reform for 2023:
- TRAIN Act Impact: The Tax Reform for Acceleration and Inclusion (TRAIN) Act proposes personal income tax rate reductions effective January 1, 2023. The Act outlines the new tax brackets and rates, aiming for lower personal income tax burdens.
By understanding these concepts, property owners and investors in the Philippines can navigate the complexities of rental income taxation and make informed decisions regarding their real estate ventures.
