What You Need to Know about Tax on Rental Income
Renting out property is a great way to make money from real estate, and it is important to know the tax levied on this income in order 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’s 2015 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.”
With demand for rental properties remaining stable, the financial benefits of renting out or leasing properties is a tried-and-tested business venture. However, like any business endeavor, there are taxes associated with leasing or renting out property, and to avoid missing or miscalculating payments (and hefty fines in the process), a basic understanding of the income tax rate that will be imposed on your rental properties is very important.
Rental Income Tax
Rental income tax is the tax charged when properties or equipment are leased. It is what is charged in lieu of sales tax, since no purchases are made but leasing services are rendered and earned from. It is commonly collected by the lessor or landlord as part of the rental payments over the lease term.
Like other taxes, there are provisions that make an owner of a rental property or lessor subject to rental income tax. These are the following assumptions:
- 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 lessors 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 amount to anywhere between 40 to 90 percent of the total gross income.
This can be established via a standard percentage, or by actual incurred costs—the latter of which is more common. This includes repairs and maintenance, and depreciation, as well as taxes and licenses such as local business tax, mayor’s permit, and real property tax.
Value Added Tax
Leasing a property is categorized as a service, which also makes it subject to value added tax (VAT). 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:
- A 12 percent VAT is imposed on residential property leases that satisfy certain conditions. The VAT burden is generally shouldered by the tenants but for calculation purposes, it is added to the landlord’s tax liability.
- Properties with rental payments exceeding Php12,800 ($272) per month received by landlords whose gross rental income per year exceed Php1,919,500 ($40,840) are subject to 12 percent VAT.
- 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.
- Properties with rental payments below Php12,800 ($272) per month are exempt from VAT.
Filing Rental Income Tax
Rental income tax 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); thus, it will be filed under BIR Form 1701. If you are earning money from a rental property, you will need to fill out this BIR form.
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. For more information on the documentary requirements for the filing of rental income tax, the associated filing procedure, and penalties in the event of late filing, landlords can visit the Bureau of Internal Revenue’s official government website: http://www.bir.gov.ph