Lessons in Real Estate No. 2 "we build to live and not to destroy"

The process of establishing a human settlement or building a community is never a simple or easy task. There are several major concerns that must be considered, such as but not limited to the environmental impact of a project specifically on the community (use of environment friendly materials, designs etc), its effect on the value of the property in the area (whether the project would increase the value of the surrounding areas, and obviously, one would definitely adversely affect the price of property if a factory or high rise building were to be built in a residential area), the potential which it can provide to itself as well as to the neighborhood (like building a "trendsetting" house) and the list goes on. The point here is that whenever there is a project, be it a house, a condominium or a subdivision, it is important that the area is developed in a manner that it will not be out there to destroy the environment or the community itself. Therefore, when one intends to have a house built, make sure that the drainage and sewerage systems are appropriately designed that would not be a source of environmental or waste disposal problems later on; further, the materials used must not be toxic, design should encourage safety and the use of the natural environment (meaning, less aircon, more fresh air, less energy consumption, more sunlight, less noise emissions), and there should be spaces for the greening of the home where plants and trees could be grown for a healthier environment. In order words, a home, a condominium, a building, or any project should be built that people may live in a clean, safe and happy environment.

REAL ESTATE APPRAISAL

Real estate appraisal, property valuation or land valuation is the process of valuing real property. The value usually sought is the property's Market Value. Appraisals are needed because compared to, say, corporate stock, real estate transactions occur very infrequently. Not only that, but every property is different from the next, a factor that doesn't affect assets like corporate stock. Furthermore, all properties differ from each other in their location - which is an important factor in their value. So a centralized Walrasian auction setting can't exist for the trading of property assets, such as exists to trade corporate stock (i.e. a stock market/exchange). This product differentiation and lack of frequent trading, unlike stocks, means that specialist qualified appraisers are needed to advise on the value of a property. The appraiser usually provides a written report on this value to his or her client. These reports are used as the basis for mortgage loans, for settling estates and divorces, for tax matters, and so on. Sometimes the appraisal report is used by both parties to set the sale price of the property appraised.

In some areas, an appraiser doesn't need a license or any certification to appraise property. Usually, however, most countries or regions require that appraisals are done by a licensed or certified appraiser (in many countries known as a Property Valuer or Land Valuer and in British English as a "valuation surveyor"). If the appraiser's opinion is based on Market Value, then it must also be based on the Highest and Best Use of the real property. For mortgage valuations of improved residential property in the US, the appraisal is most often reported on a standardized form, such as the Uniform Residential Appraisal Report. Appraisals of more complex property (e.g. -- income producing, raw land) are usually reported in a narrative appraisal report.

(Source: http://en.wikipedia.org/wiki/Real_estate_appraisal)

Who are conditionally exempt from the payment of Final Capital Gains Tax?

Natural persons who dispose their principal residence, provided that the following criteria are met:

• The proceeds of the sale of the principal residence have been fully utilized in acquiring or constructing new principal residence within eighteen (18) calendar months from the date of sale or disposition;
• The historical cost or adjusted basis of the real property sold or disposed will be carried over to the new principal residence built or acquired;
• The Commissioner has been duly notified, through a prescribed return, within thirty (30) days from the date of sale or disposition of the person's intention to avail of the tax exemption;
• Exemption was availed only once every ten (10) years; and
• There is no full utilization of the proceeds of sale or disposition. The portion of the gain presumed to have been realized from the sale or disposition will be subject to Capital Gains Tax.
• In case of sale/transfer of principal residence, the Buyer/Transferee shall withhold from the seller and shall deduct from the agreed selling price/consideration the 6% capital gains tax which shall be deposited in cash or manager's check in interest-bearing account with an Authorized Agent Bank (AAB) under an Escrow Agreement between the concerned Revenue District Officer, the Seller and the Transferee, and the AAB to the effect that the amount so deposited, including its interest yield, shall only be released to such Transferor upon certification by the said RDO that the proceeds of the sale/disposition thereof has, in fact, been utilized in the acquisition or construction of the Seller/Transferor's new principal residence within eighteen (18) calendar months from date of the said sale or disposition. The date of sale or disposition of a property refers to the date of notarization of the document evidencing the transfer of said property. In general, the term "Escrow" means a scroll, writing or deed, delivered by the grantor, promisor or obligor into the hands of a third person, to be held by the latter until the happening of a contingency or performance of a condition, and then by him delivered to the grantee, promise or obligee.
  
  
  (Source: http://www.bir.gov.ph/taxinfo/tax_capgin.htm)

What is a Certificate Authorizing Registration?

Certificate Authorizing Registration (CAR) is a certification issued by the Commissioner or his duly authorized representative attesting that the transfer and conveyance of land, buildings/improvements or shares of stock arising from sale, barter or exchange have been reported and the taxes due inclusive of the documentary stamp tax, have been fully paid.

CARs shall now have a validity of one (1) year from date of issue. In case of failure to present the same to the Registry of Deeds (RD) within the one (1) year period, the same shall be presented for revalidation to the District Office where the CAR was issued. The revalidation, evidenced by stamping the phrase "revalidated on __________ to expire on ___________" in a conspicuous space in the CAR, shall be good for another one-year period, after which the CAR losses its validity. (RMO 15-2003)

(Source : http://www.bir.gov.ph/taxinfo/tax_capgin.htm)

Who/what are considered exempt from the payment of Final Capital Gains Tax?

• Dealer in securities, regularly engaged in the buying and selling of securities
• An entity exempt from the payment of income tax under existing investment incentives and other special laws
• An individual or non-individual exchanging real property solely for shares of stocks resulting in corporate control
• A government entity or government-owned or controlled corporation selling real property
• If the disposition of the real property is gratuitous in nature
• Where the disposition is pursuant to the CARP law

What is the procedure in the filing of Final Capital Gains Tax return?

File the Final Capital Gains Tax return in triplicate (two copies for the BIR and one copy for the taxpayer) with the Authorized Agent Bank (AAB) in the Revenue District where the seller or transferor is registered, for shares of stocks or where the property is located, for real property. In places where there are no AAB, the return will be filed directly with the Revenue Collection Officer or Authorized City or Municipal Treasurer. 

(Excerpts from Source :  http://www.bir.gov.ph/taxinfo/tax_capgin.htm)

Who are required to file the Final Capital Gains Tax return?

Every person, whether natural or juridical, resident or non-resident, including estates and trusts, who sells, transfers, exchanges or disposes real properties located in the Philippines classified as capital assets, including pacto de retro sales and other forms of conditional sales or shares of stocks in domestic corporations not traded through the local stock exchange classified as capital assets. 

(Excerpts from Source :  http://www.bir.gov.ph/taxinfo/tax_capgin.htm)

What is the basis in the valuation of property?

The value of the real property will be based on the selling price, fair market value as determined by the Commissioner (zonal value) or the fair market value as shown in the schedule of values of the Provincial or City Assessor, whichever is higher.

If there is no zonal value, the taxable base is whichever is higher of the gross selling price per sales documents or the fair market value that appears in the latest tax declaration.

If there is an improvement, the FMV per latest tax declaration at the time of the sale or disposition, duly certified by the City/Municipal Assessor shall be used. No adjustments shall be added on the said value, provided that the tax declaration bears the upgraded fair market value of the said property pursuant to Section 219 of R.A. No. 7160, otherwise known as the Local Government Code of 1991 and the last paragraph of the Local Assessment Regulations No. 1-92 dated October 6, 1992.

In case the tax declaration being presented was issued three (3) or more years prior to the date of sale or disposition of the real property, the seller/transferor shall be required to submit a certification from the City/Municipal Assessor whether or not the same is still the latest tax declaration covering the said real property. Otherwise, the taxpayer shall secure its latest tax declaration and shall submit a copy thereof duly certified by the said Assessor. (RAMO 1-2001)

For shares of stocks, it will be based on the net capital gains realized from the sale, barter, exchange or other disposition of shares of stocks in a domestic corporation, considered as capital assets not traded through the local stock exchange.

(Excerpts from Source : http://www.bir.gov.ph/taxinfo/tax_capgin.htm)

How can you determine whether a particular real property is a capital asset or an ordinary asset?

a) Real properties shall be classified with respect to taxpayers engaged in the real estate business as follows:

i) All real properties acquired by the real estate dealer shall be considered as ordinary assets.

ii) All real properties acquired by the real estate developer, whether developed or undeveloped as of the time of acquisition, and all real properties which are held by the real estate developer primarily for sale or for lease to customers in the ordinary course of his trade or business or which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year and all real properties used in the trade or business, whether in the form of land, building, or other improvements, shall be considered as ordinary assets.

iii) All real properties of the real estate lessor, whether land, building and/or improvements, which are for lease/rent or being offered for lease/rent, or otherwise for use or being used in the trade or business shall likewise be considered as ordinary assets.

iv) All real properties acquired in the course of trade or business by a taxpayer habitually engaged in the sale of real property shall be considered as ordinary assets.

Note: Registration with the HLURB or HUDCC as a real estate dealer or developer shall be sufficient for a taxpayer to be considered as habitually engaged in the sale of real estate.

If the taxpayer is not registered with the HLURB or HUDCC as a real estate dealer or developer, he/it may nevertheless be deemed to be engaged in the real estate business through the establishment of substantial relevant evidence (such as consummation during the preceding year of at least six (6) taxable real estate sale transactions, regardless of amount; registration as habitually engaged in real estate business with the Local Government Unit or the Bureau of Internal Revenue, etc.)

b) In the case of taxpayer not engaged in the real estate business, real properties, whether land, building, or other improvements, which are used or being used or have been previously used in trade or business of the taxpayer shall be considered as ordinary assets.

c) In the case of taxpayers who changed its real estate business to a non-real estate business, real properties held by these taxpayer shall remain to be treated as ordinary assets.

d) In the case of taxpayers who originally registered to be engaged in the real estate business but failed to subsequently operate, all real properties acquired by them shall continue to be treated as ordinary assets.

e) Real properties formerly forming part of the stock in trade of a taxpayer engaged in the real estate business, or formerly being used in the trade or business of a taxpayer engaged or not engaged in the real estate business, which were later on abandoned and became idle, shall continue to be treated as ordinary assets. Provided however, that properties classified as ordinary assets for being used in business by a taxpayer engaged in business other than real estate business are automatically converted into capital assets upon showing proof that the same have not been used in business for more than two years prior to the consummation of the taxable transactions involving said properties

f) Real properties classified as capital or ordinary asset in the hands of the seller/transferor may change their character in the hands of the buyer/transferee. The classification of such property in the hands of the buyer/transferee shall be determined in accordance with the following rules:

i) Real property transferred through succession or donation to the heir or donee who is not engaged in the real estate business with respect to the real property inherited or donated, and who does not subsequently use such property in trade or business, shall be considered as a capital asset in the hands of the heir or donee.

ii) Real property received as dividend by the stockholders who are not engaged in the real estate business and who do not subsequently use such property in trade or business, shall be considered as a capital asset in the hands of the recipients even if the corporation which declared the real property dividends is engaged in real estate business.

iii) The real property received in an exchange shall be treated as ordinary asset in the hands of the case of a tax-free exchange by taxpayer not engaged in real estate business to a taxpayer who is engaged in real estate business, or to a taxpayer who, even if not engaged in real estate business, will use in business the property received in exchange.

g) In the case of involuntary transfers of real properties, including expropriations or foreclosure sale, the involuntariness of such sale shall have no effect on the classification of such real property in the hands of the involuntary seller, either as capital asset or ordinary asset as the case may be.

(Excerpts from Source : http://www.bir.gov.ph/taxinfo/tax_capgin.htm)

WHAT IS MEANT BY CAPITAL ASSET?

Capital asset means property held by the taxpayer (whether or not connected with his trade or business), but does not include –

a) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year; or

b) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or

c) property used in the trade or business of a character which is subject to the allowance for depreciation provided in subsection (F) of Sec. 34 of the Code; or

d) real property used in trade or business of the taxpayer.

(Excerpts from Source : http://www.bir.gov.ph/taxinfo/tax_capgin.htm)

WHAT IS A CAPITAL GAINS TAX?

Capital Gains Tax is a tax imposed on the gains presumed to have been realized by the seller from the sale, exchange, or other disposition of capital assets located in the Philippines, including pacto de retro sales and other forms of conditional sale.(Excerpts from Source : http://www.bir.gov.ph/taxinfo/tax_capgin.htm)

Lessons in Real Estate No. 1 "sustainability is a duty we owe to future generations for the earth is merely held in trust by us"

“x-x-x the concept of intergenerational responsibility insofar as the right to a balanced and healthful ecology is concerned. x-x-x considers the "rhythm and harmony of nature." Nature means the created world in its entirety. Such rhythm and harmony indispensably include, inter alia, the judicious disposition, utilization, management, renewal and conservation of the country's forest, mineral, land, waters, fisheries, wildlife, off-shore areas and other natural resources to the end that their exploration, development and utilization be equitably accessible to the present as well as future generations. Needless to say, every generation has a responsibility to the next to preserve that rhythm and harmony for the full enjoyment of a balanced and healthful ecology. Put a little differently, the minors' assertion of their right to a sound environment constitutes, at the same time, the performance of their obligation to ensure the protection of that right for the generations to come.” Excerpts from Source : Oposa et al. vs. Factoran et al., G.R. No. 101083 July 30, 1993

FAIR MARKET VALUE AND ESTIMATING IT

   “Fair market value” is the price at which a property may be sold by a seller who is not compelled to sell and bought by a buyer who is not compelled to buy, taking into consideration all uses to which the property is adapted and might in reason be applied.  The criterion established by the statute contemplates a hypothetical sale.  Hence, the buyers need not be actual and existing purchasers.

          As this Court stressed in Reyes v. Almanzor, assessors, in fixing the value of real property, have to consider all the circumstances and elements of value, and must exercise prudent discretion in reaching conclusions.  In this regard, Local Assessment Regulations No. 1-92 establishes the guidelines to assist assessors in classifying, appraising and assessing real property.

          Local Assessment Regulations No. 1-92 suggests three approaches in estimating the fair market value, namely: (1) the sales analysis or market data approach; (2) the income capitalization approach; and (3) the replacement or reproduction cost approach.

          Under the sales analysis approach, the price paid in actual market transactions is considered by taking into account valid sales data accumulated from among the various sources stated in Sections 202, 203, 208, 209, 210, 211 and 213 of the Code.

          In the income capitalization approach, the value of an income-producing property is no more than the return derived from it.  An analysis of the income produced is necessary in order to estimate the sum which might be invested in the purchase of the property.

          The reproduction cost approach, on the other hand, is a factual approach used exclusively in appraising man-made improvements such as buildings and other structures, based on such data as materials and labor costs to reproduce a new replica of the improvement.

          The assessor uses any or all of these approaches in analyzing the data gathered to arrive at the estimated fair market value to be included in the ordinance containing the schedule of fair market values.

          Given these different approaches to guide the assessor, it can readily be seen that the Code did not intend to have a rigid rule for the valuation of property, which is affected by a multitude of circumstances which no rule could foresee or provide for.  Thus, what a thing has cost is no singular and infallible criterion of its market value.

Excerpts from Source :  Allied Banking Corporation vs. The QC Government G.R. No.  154126, October 11, 2005

DETECTING FRAUDS AND FAKE TITLES

There is no hard and fast rule in detecting fake or spurious titles. They come in many forms and style. But still the bottomline is when referring to such titles, it should be understood that the certificate of title itself purporting to be genuine is actually fake. It is a counterfeit and therefore, it has no value whatsoever.

When one intends to buy a property, or otherwise, when receiving certificates of title for purposes of transferring ownership, it is important to check on the following:

1. Examine the certificate of title, and if you need clarification, do not hesitate to ask questions.

2. Who is the owner? Does the civil status appear on the title? If married, who is the spouse? If single, is it still true at this time? What is the age? If a minor, who is the parent or guardian? Where is the place of residence? What is the address indicated? Is it still the actual address at the time of examination?

3. Next step is to look at the history of transactions. Is it clean? Meaning, there is no lien or encumbrance like a mortgage, lis pendens, or adverse claim. There could be a possibility that the certificate of title is an old one and had already been replaced by another but which may already be under the name of another person. Thus, the old title in this case is spurious.

4. Always obtain a photocopy of the certificate of title and check its current status with the Register of Deeds of the locality having jurisdiction over the property in question.

5. Find out if realty taxes have been paid and updated. You will need to go to the local government office of the treasurer and found out if payment is current. You may want to secure a certification of payments made and status of the property.

6. It is also important to secure an updated tax declaration from the assessor's office of the local government unit.

7. It may be helpful to obtain a location and a survey plan approved by the Bureau of Lands. Usually, the name of the owner and the title being referred to are indicated in the map or plan.

8. Of course, the next best thing to do is to check on the property. Based on the documents you have gathered, and through the help of license experts such as a broker, appraiser, consultant or geodetic engineer, you can certain the truthfulness of the data indicated in the title.

In a capsule, when still in doubt, ask more questions and secure more documents like real property tax receipts, among others.

OUR MISSION

Real property ownership is admittedly the most sought goal in the hierarchy of human needs. Neither can it be eaten nor cover your body. But it can provide your food to fill your stomach and your clothes to keep you warm. A source of income that can buy what you need. It can serve as your life's material security and stability over which you build your home, or by which you can obtain the needed business capital by mortgaging or selling it. Or perhaps it can be something of sentimental value or part of a family heritage where money is not a consideration.

Simply put, viewed from a practical perspective, real property is synonymous to this "material world". It is essentially, wealth. People work and even die for it. Wars have been won or lost due to claims over territory. Relationships are built or destroyed because of land disputes or settlement.

Government has several departments focused on protecting and preserving its patrimony or natural resources, and the country's territory; registering it for private ownership by corporations and individuals; distributing it as part of agrarian reform; financing and utilizing it for housing, agricultural and industrial uses; or revenue generation, among others.

Real property is measured by metes and bounds. The boundaries are important in ownership. They must basically be precise and identifiable. They should not encroach on each other lest there be a dispute or controversy.

Ownership must be clearly established with due consideration to legal titles and rights. Tax and contractual obligations must be updated or settled. For it to have further value, it must be clean. This means it can freely disposed of free from any lien or encumbrance.

Transactions dealing with realty are actually complex and completed. Even realty practitioners would have different and sometimes irreconcilable views or approaches to the same problem or situation.

Thus, laws have been passed, rules were formulated, decisions handed down, realty organizations are gearing toward integration, realty practice are being professionalized and regulated, and government agencies concerned are placed under an umbrella institution.

It is the intention of Metes & Bounds to provide a "one-click & one-site" online reference to realty matters as a public service. The end in view is to create an awareness among realty stakeholders and simplify the otherwise complicated terms about then and recent practices.

WELCOME TO METES & BOUNDS !

Mabuhay !

In my long years as a real estate law practitioner, I have heavily utilized the internet. So far it has served me a bit well in terms of expediting and simplifying my work. However, there will always be something lacking and wanting in the internet as it is obviously never perfect.

It is my belief that there has to be some way by which I can make a difference in this world and through this work together with my wife and children. This blog is among those which I find to be a great opportunity in sharing what has been learned and experienced through all these years.

This blog had been created for informational and educational purposes. It is intended to provide data and information as well as links which are deemed helpful in a person's research works. The blog will focus on the the Philippine's real estate industry including current events and other useful ideas.  It will advocate the promotion of sustainable use and development of earth's resources, specifically land and water.

Today, being a special day for me and my loving wife, Cheva, I dedicate this blog to her and to our children.

Atty. Caloy Caliwara