VAT on Real Estate: When the 12% Tax Applies
Learn when the 12% value-added tax applies to real estate transactions. Understand the VAT-exempt thresholds, who is liable, and how it interacts with other taxes.
When VAT Applies to Real Estate Sales
“There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to twelve percent (12%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor.”
What This Means
The 12% VAT applies to the sale of real property when the seller is VAT-registered or required to be VAT-registered (gross annual sales exceed P3,000,000). This typically means real estate developers and dealers. The key distinction: if the seller is in the business of selling real property (ordinary asset), VAT applies. If it is a one-time sale of personal property (capital asset), the 6% CGT applies instead. not VAT. A seller cannot be subject to BOTH CGT and VAT on the same transaction.
- VAT rate: 12% of gross selling price or FMV, whichever is higher
- Applies when seller is VAT-registered or required to register (>P3M annual sales)
- Developers and dealers selling ordinary assets = VAT applies
- Individual selling capital asset = CGT applies, NOT VAT
- VAT and CGT are mutually exclusive. never both on same transaction
Real-World Scenario
Green Meadows Development Corp. (a registered developer) sells a residential lot for P4,000,000. The zonal value is P3,500,000. Separately, their purchasing manager sells his personal house and lot for P6,000,000.
Which sale is subject to VAT?
VAT-Exempt Residential Real Estate
“The following sales by VAT-registered persons shall be exempt from the value-added tax: Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business or real property utilized for low-cost housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, such as Republic Act No. 7835 and Republic Act No. 8763... residential lot valued at One million five hundred thousand pesos (P1,500,000) and below, or house and lot and other residential dwellings valued at Two million five hundred thousand pesos (P2,500,000) and below.”
What This Means
Even VAT-registered sellers are exempt from VAT on residential real estate below certain price thresholds. The TRAIN Law set the base amounts at P1,500,000 for residential lots and P2,500,000 for house-and-lot. These thresholds are adjusted annually for inflation by the BIR. Socialized housing and low-cost housing (as defined by UDHA/RA 7279) are always VAT-exempt regardless of price. Commercial and industrial properties have no such exemption. VAT always applies if the seller is VAT-registered.
- Residential lot: VAT-exempt if ≤ P1,500,000 (base amount, adjusted annually)
- House and lot: VAT-exempt if ≤ P2,500,000 (base amount, adjusted annually)
- Socialized housing: always VAT-exempt regardless of price
- Thresholds adjusted yearly for inflation per BIR Revenue Regulations
- Commercial/industrial properties: NO threshold exemption. always VATable if seller is VAT-registered
Real-World Scenario
A developer sells three units in the same project: (A) a socialized housing unit at P800,000, (B) a residential lot at P1,400,000, and (C) a residential condominium unit at P4,500,000. The developer is VAT-registered.
Which units are subject to 12% VAT?
VAT on Lease of Real Property
“The term "sale" or "exchange" of services shall likewise include: The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; The lease or the use of, or the right to use of, any industrial, commercial, or scientific equipment; The supply of scientific, technical, industrial or commercial knowledge or information; The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of any such property, or right as is mentioned in subparagraph (a) hereof or any such knowledge or information as is mentioned in subparagraph (c) hereof; The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from, such nonresident person; The lease of motion picture films, films, tapes, and discs; and The lease or the use of or the right to use radio, television, satellite transmission and cable television time... Lease of properties shall be subject to the tax herein imposed.”
What This Means
Leasing real property is treated as a "sale of services" subject to 12% VAT if the lessor is VAT-registered or required to register. However, residential units leased for not more than P15,000 per month are VAT-exempt under the TRAIN Law. For lessors with aggregate annual gross receipts from leases not exceeding P3,000,000, they fall below the VAT registration threshold and are instead subject to 3% percentage tax. This is important for brokers managing rental properties.
- Lease of real property = "sale of services" subject to 12% VAT
- Exemption: residential unit lease ≤ P15,000/month (TRAIN Law threshold)
- Lessor below P3M annual gross receipts: 3% percentage tax instead of VAT
- Commercial leases: always VATable if lessor is VAT-registered
- VAT on lease is based on monthly rental (including escalation, CUSA, etc.)
Real-World Scenario
Mrs. Santos owns 10 residential condo units, each leased at P20,000/month. Her total annual rental income is P2,400,000. She is not VAT-registered.
Is Mrs. Santos subject to VAT on her rental income?
Frequently Asked Questions
Can a buyer claim input VAT on a real estate purchase?
Yes, if the buyer is a VAT-registered entity that will use the property in its VATable business (e.g., a company buying an office for its operations). The 12% VAT on the purchase becomes an input tax creditable against the buyer's output VAT. However, if the buyer is an individual purchasing for personal use, there is no input VAT claim available.
Is VAT included in the selling price or added on top?
For real estate developers, VAT is typically included in the advertised selling price (VAT-inclusive pricing). However, the deed of sale should clearly state the breakdown: the VATable selling price and the VAT amount. If the contract is silent, the BIR presumes the selling price is VAT-inclusive, and the VAT is computed as: Selling Price ÷ 1.12 × 0.12.
What happens if a developer sells below the VAT-exempt threshold?
If the residential property is at or below the VAT-exempt threshold (P1.5M for lots, P2.5M for house and lot), the sale is VAT-exempt even if the developer is VAT-registered. The developer issues a VAT-exempt sale receipt instead of a VAT invoice. No output VAT is charged, but the developer also cannot claim input VAT attributable to that exempt sale.