New Year,new properties, old woes

That must have been the least “bombastic” New Year celebration that I can remember. Credit that to the unceremonious banning of “Hello Miss Colombia” mini-bombs and the stricter government rules on firecrackers – all are welcome. I know you would rather have me write on the Miss Colombia bomb, but it’s the New Year, and my attempt to write something relevant starts with answering some of my readers’ questions. Facts are sometimes adjusted here to avoid clues on the property or the individual asking.

Q. Sale of residence. I am the only daughter, and my parents want me to be physically close even after I get married. They intend to sell to me their present residence, and then they will buy the smaller adjacent property to that. How can they avail of tax exemption?

A. Sale prices between parents and children are normally not strictly based on the best price you can get for that property, and this is humanly understandable.

Now, there is a general rule that if you sell a property for less than sufficient consideration, the difference between the price and the fair market value of the property is considered a gift, which is subject to 30 percent donor’s tax. The good thing is that this deemed donation rule does not apply when residential property is sold. While sale of residential property could be subject to 6 percent capital gains tax (based on the selling price or zonal value of the property, whichever is higher), it will not be due if what your parents are selling is their principal residence. This information can be shown in their Income Tax Return if they are still earning, or in a sworn affidavit with other supplemental reference (like an old tax return where this property was referred to). Your parents need to formally inform the Bureau of Internal Revenue (BIR) of their intention to avail of the exemption 30 days from the date of transaction.

Note that if your parents will merely buy the adjacent land, that is not enough. They must actually construct their residence there within 18 months from the sale. The most onerous requirement is that the capital gains tax that would otherwise be due will be placed in escrow in an authorized agent bank in coordination with the revenue district officer of the BIR having jurisdiction over your parents’ place of residence. Such tax in escrow shall be released upon proof of usage of the proceeds to construct a new house. Unused proceeds, if any, will be subject to capital gains tax.

Q. Untransferred inherited land. I am a Filipino who has lived in the US. I inherited land from my father who died in 1992. The land was assigned to me way back via an extrajudicial partition with my siblings. The value of that property has since appreciated considerably with the development of residential villages, malls and 24/7 stores in the area. I want to transfer it now under my name. Is it more expensive to transfer now because the property is now so valuable?

A. Like many extrajudicial partitions I have observed, siblings agree but do not implement by formal transfer of title to avoid paying estate taxes. To answer your question, what is due on the property is still estate tax. Since properties transfer by operation of law upon death, the value of the property in 1992 shall be the basis of the estate tax. Its current fair market value can be ignored. Note, however that late payment of estate tax, in addition to 25 percent surcharge, is subject to interest at 20 percent per annum. I hope the smaller fair market value of the property in 1992 will allow you to manage paying all the increments.

Q. Succession on financial assets. I am a US citizen happily married to a Filipina. Our bank accounts and investments are under our names, except for some that are under her name. If she will die before me, which is unlikely, is it true that I only need to show the death certificate of my wife and I can claim the rest of the account or investment?

A. Assuming you are legally married, without a prenuptial agreement, your financial assets, earned or acquired by you during the marriage, are conjugal. That means she owns 50 percent of those assets. A death certificate is not enough as payment of estate taxes on that 50 percent share is required before you can access the rest of the account. Banks see to it that this is done before they release the accounts as they are mandated by tax law to do this.

Q. Rizal for our times. This is not a question but a reaction from a reader of my recent article entitled Recycling, Rizal style. Allow me to print it here to share its emphatic message.

“Your write-up has contributed significantly to the national awareness and self-reflection on the teachings of Dr. Rizal, as its collective value serves as the national compass for meaningful growth and development. Your column is most timely as we oftentimes are reticent witnesses to the indifference of so many of our youth nowadays, to the sacrifices and the great nationalist tradition bequeathed by our heroes. Some of them do not appreciate that the nation that we now hold so dear is not what it is today without the supreme sacrifice in the altar of freedom by the hordes of great Filipinos from Lapu-Lapu in Mactan to Jose Rizal in Bagumbayan who all fell to ‘heroic death so that a Filipino nation could rise,’ as one noted Rizalist eloquently said it so well. May you continue to inspire others to rise above themselves.” (From Mr. Emmanuel Cabusao, Counsel of Elders, Order of the Knights of Rizal)

Talking of heroes, you must have seen as I have on news, the teary farewells of OFWs, including mothers who need to go back to the Middle East before the New Year celebrations. They swear that their tears are because they will not see their family again for the next two years, as they drag themselves to the departure areas and stare back from afar to the family they would rather not leave behind before the year turns.

The first days of the New Year are indeed the toughest ones. We are back to Earth; we turn the page, but not really feeling ready for the normal difficult grind. It may help to think that we are all together in this human grind, and it may also help to think for many of us that we can have the good fortune of being able to come home to our families after a hard day of work, every day, for the rest of the year. This toast of best wishes and courage is for the many who work hard for the people back home but who can’t come home! A salute to all of you!

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Alexander B. Cabrera is the chairman and senior partner of Isla Lipana & Co./PwC Philippines. Email your comments and questions to [email protected]. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.