Closing of Real Estate Sale Transactions and Transfer of Title
Once the buyer and seller agree on the sale of a real estate property, the next steps would be to close the transaction through a Deed of Absolute Sale, and then process the payment of taxes and transfer of title from the seller to the buyer.
A Torrens title is accorded the highest degree of proof of ownership. Once an individual is able to present an Original Certificate of Title (OCT) or Transfer Certificate of Title (TCT) over a property under his name, his title thereto, generally, becomes indisputable. It is precisely the reason why registration of the Deed of Absolute Sale and the transfer of the title to the property from the seller to the buyer are necessary.
Below is a basic step-by-step guide, which a seller and/or buyer can follow in the closing of a real estate sale transaction:
1. Execute a Deed of Absolute Sale
The most basic Deed of Absolute Sale should contain the relevant details about the parties, purchase price, manner of payment, deadline for payment, tax liabilities and other obligations of the parties, and description of the real estate property. A Deed of Absolute Sale that contains these information should be enough for the buyer and seller to close the sale transaction.
We advise, however, the buyer and seller to incorporate additional special provisions in the Deed of Absolute Sale to prevent future disputes and explain clearly the respective rights and obligations of both parties. Among these provisions are the following:
a. Technical Description of the real estate property (as shown in the property title);
b. Categorical statement of the transfer of ownership and possession from the seller to the buyer;
c. Responsibility for taxes, commission of broker and agent, notarial and legal fees, and other fees paid to be paid to the government;
d. Warranties of the buyer and seller;
e. Separability clause;
f. Default clause;
g. Termination clause;
h. Relativity clause; and
i. Venue stipulation.
The above-mentioned guide, however, applies only to a basic and straightforward real estate sale transaction. Some sales require special provisions and additional documentations, such as a Contract to Sell, Deed of Conditional Sale, Option Contract or Special Power of Attorney, among others. In such case, it would be best to consult a real estate attorney to ensure that your interest is protected.
2. Secure a Certificate Authorizing Registration (CAR) from the Bureau of Internal Revenue (BIR)
The next step is the processing of CAR, which is a form of tax clearance issued by the BIR, which is required in transferring the title to the real property in the name of the buyer. The issuance of the CAR means that the required taxes relevant to the transfer of the real estate property have already been paid. Taxes which shall be paid before the BIR include (a) capital gains tax and (b) documentary stamp tax.
a. Capital Gains Tax (CGT)
Under the Tax Code (as amended), a final tax of 6% based on the “gross selling price or current fair market value as determined in accordance with the Tax Code, whichever is higher, is paid upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines.”
Where to Pay: The seller of the real property is liable to pay said tax to the BIR Revenue District Office (RDO) which has jurisdiction over the location of the property.
Period to Pay: The seller must file the CGT return and pay the CGT due within thirty (30) days from the sale transaction (i.e., date of execution (and notarization) of deed of absolute sale).
Penalties for Late Payment: Late payment of the CGT shall result to surcharge of 25%, pro-rated 12% annual interest,and other compromise penalties.
b. Documentary Stamp Tax (DST)
DST is a tax on documents, instruments, loan agreements and papers evidencing the acceptance, assignment, sale or transfer of an obligation, right or property. Simply put, the tax is due on the deed of conveyance. This tax is paid to the BIR RDO where the property is located. The DST is 1.5% of the gross selling price or current fair market value (whichever is higher as determined in accordance with the Tax Code).
Where to Pay: BIR RDO where the property is located.
Period to Pay: The DST return shall be filed and the tax paid within five (5) days after the close of the month when the taxable document was made, signed, issued, accepted or transferred.
Penalties for Late Payment: Late payment of the DST shall result to surcharge of 25%, pro-rated 12% annual interest, and other compromise penalties.
A CAR will be issued only if the foregoing taxes for the transfer of the property have been paid. In the absence of the CAR, the title to the property will not be transferred to the new owner.
3. Pay the Transfer Taxes to the Treasurer’s Office of the concerned Local Government Unit (LGU)
The Local Government Code of 1991 (LGC) also imposes tax on the sale or transfer of ownership or title to a real property. This is in the nature of a transfer tax.
Transfer tax is the tax imposed on the sale, barter, or any other method of transferring of the ownership or title of real property. It is imposed at the maximum rate of 50% of 1% of a property’s worth (in the case of cities and municipalities within Metro Manila, this is 75% of 1%), depending on the specific LGU.
Where to Pay: Transfer taxes shall be paid before the LGU that has jurisdiction over the location of the property. In particular, the transfer tax shall be paid to the Treasurer’s Office of the City or Municipality where the property is located.
The following are the requirements for the payment of the transfer tax:
a. CAR from the BIR;
b. Real property tax clearance from the Treasurer’s Office; and
c. Official Receipt from the BIR (for the DST).
Period to Pay: The payment of transfer tax is the responsibility of the seller or transferor and shall be paid within sixty (60) days from the date of execution of the deed of conveyance.
Penalties: In case of late payment of the transfer tax, the following penalties may be imposed:
a. Surcharge not exceeding 25% of the amount of taxes, fees, charges or charges not paid on time; and
b. Interest at the rate not exceeding 2% per month of the unpaid taxes, fees or charges until such amount is fully paid but in no case shall the total interest on the unpaid amount or portion thereof exceed thirty-six (36) months (see LGC, Section 168).
Once paid, the LGU concerned will issue clearance or evidence of payment of transfer taxes. This clearance from the LGU is a mandatory requirement before the Deed of Absolute Sale may be registered with the Register of Deeds (RD).This is also required for the cancellation of the old tax declaration.
4. Pay the Registration Fees before the RD
If the taxes required to be paid to the BIR and the concerned LGU are already paid and their corresponding clearances/evidence of payment have been issued, the buyer may now register the Deed of Absolute Sale before the RD for the issuance of a new title in his name. The CAR, tax clearances, and documents proving tax payments should be submitted to the RD to proceed with the registration, in addition to the owner’s duplicate copy of the property title.
Registration fees shall also be paid to the RD. Please note that it is important to verify the contents of the new title once it is issued, including the name, area, and the technical description of the property. If found incorrect, report the erroneous details immediately to the RD.
5. Request for the cancellation of the old tax declaration
After the issuance of the new TCT in the name of the buyer/transferee, the final step is to present the documents to the Local Assessor’s Office of the concerned LGU. In particular:
a. New TCT;
c. Verified/Certified True Copy of the Old TCT; and
d. Verified copy of the Tax Declaration of the seller/previous owner.
Upon verification of the LGU of the authenticity of the documents, the LGU will now cancel the former tax declarations in the name of the previous owner. The buyer, as the new owner, shall pay the assessment fees for the issuance of the new tax declaration in his name.
The closing of a real estate transaction and transfer of title from the buyer to the seller are technical processes that involve active coordination with the appropriate government agencies. If these steps are not followed, there may arise legal issues on ownership and tax compliances.
*Arceo Balmoja & Irasusta Law Firm is a real estate law office in Bulacan. Its property lawyers have an extensive experience in conducting land due diligence and closing real estate transactions. Should you wish to learn more about real estate or land, you may contact us at firstname.lastname@example.org to get in touch with any of our Bulacan property attorneys.