Creditable Withholding Tax on Real Estate Sales
Learn about the creditable withholding tax (CWT) on sales of real property classified as ordinary assets. Understand the rates, who withholds, and filing requirements.
CWT Rates on Ordinary Asset Real Property
“The following forms of income shall be subject to creditable withholding tax: On the gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange, or transfer of real property classified as ordinary asset... (i) With a selling price of Five hundred thousand pesos (P500,000) or less. One and one-half percent (1.5%); (ii) With a selling price of more than Five hundred thousand pesos (P500,000) but not more than Two million pesos (P2,000,000). Three percent (3%); (iii) With a selling price of more than Two million pesos (P2,000,000). Five percent (5%).”
What This Means
When real property classified as an ordinary asset is sold, the buyer/withholding agent must withhold creditable withholding tax (CWT) from the payment to the seller. The rates are graduated based on selling price: 1.5% for properties up to P500K, 3% for P500K-P2M, and 5% for above P2M. Unlike the 6% CGT which is a final tax, CWT is creditable against the seller's income tax liability at year-end. The tax base is the selling price, zonal value, or assessed value. whichever is highest.
- 1.5% CWT: selling price ≤ P500,000
- 3% CWT: selling price > P500,000 but ≤ P2,000,000
- 5% CWT: selling price > P2,000,000
- CWT is creditable against seller's annual income tax (not a final tax)
- Tax base: highest of selling price, zonal value, or assessed value
Real-World Scenario
Vista Homes Inc. (a developer) sells a house and lot (ordinary asset) for P8,000,000. The zonal value is P7,200,000. The buyer is a private individual.
How much CWT should the buyer withhold?
Withholding Agent Responsibilities
“The payor who is constituted as a withholding agent under these regulations shall deduct and withhold the corresponding taxes on income payments subject to withholding and shall remit the same to the Commissioner through authorized agent banks... Every withholding agent/payor is required to issue to the payee a Withholding Tax Certificate (BIR Form No. 2307) simultaneously upon payment.”
What This Means
The buyer is the withholding agent who must deduct CWT from the payment and remit it to the BIR. The withholding agent files BIR Form 1606 (Withholding Tax Remittance Return for Real Property) and issues BIR Form 2307 (Certificate of Creditable Tax Withheld) to the seller. If the buyer fails to withhold, the buyer becomes personally liable for the tax plus penalties. For installment sales, CWT is withheld on each installment payment.
- Buyer is the withholding agent. deducts CWT from payment to seller
- File BIR Form 1606 within 10 days after the end of the month of withholding
- Issue BIR Form 2307 to the seller as proof of tax withheld
- Failure to withhold: buyer is personally liable for the tax + 25% surcharge
- Installment sales: CWT withheld proportionally on each payment
Real-World Scenario
Company A buys a commercial lot (ordinary asset) from Company B for P15,000,000. Company A pays the full P15,000,000 directly to Company B without deducting any withholding tax. Company A reasons that since Company B will pay its own income tax anyway, withholding is unnecessary.
Is Company A correct in not withholding?
CWT vs. CGT: Which Tax Applies?
“In the case of a sale, exchange, or other disposition of real property classified as ordinary asset, the provisions on the creditable withholding tax on the sale, exchange, or other disposition of real property other than capital asset shall apply. The capital gains tax under Section 24(D) and Section 27(D)(5) shall not apply to such transactions involving ordinary assets.”
What This Means
The critical question in real estate taxation is whether the property is a CAPITAL asset or ORDINARY asset, because this determines the entire tax treatment. Capital assets → 6% CGT (final, no income tax). Ordinary assets → CWT (creditable) + regular income tax + potentially VAT. The BIR uses the "primary purpose" test: if the taxpayer is in the real estate business and the property is part of their inventory or used in business, it is an ordinary asset. RR 7-2003 provides detailed guidelines for classification.
- Capital asset: 6% CGT (final tax, no further income tax)
- Ordinary asset: CWT (1.5%-5%) + regular income tax + possible VAT
- Real estate dealers/developers: ALL their properties = ordinary assets
- Individuals NOT in real estate business: personal property = capital asset
- RR 7-2003: property acquired by foreclosure = ordinary asset for banks
Real-World Scenario
Broker Santos is a licensed real estate broker who also personally owns three properties: (A) her family home, (B) a vacant lot she bought 10 years ago as an investment, and (C) a lot she acquired to subdivide and sell to clients.
Which properties are ordinary assets subject to CWT?
Frequently Asked Questions
What BIR form is used to remit the creditable withholding tax on real estate?
BIR Form 1606 (Withholding Tax Remittance Return for Onerous Transfer of Real Property Other Than Capital Asset). This is filed by the buyer/withholding agent within 10 days after the end of the month in which the withholding was made. The return is filed with the BIR RDO where the property is located.
Can the seller recover the CWT if they have no income tax due?
Yes. Since CWT is creditable (not final), the seller can apply it against their income tax liability. If the CWT exceeds the seller's income tax due for the year, the excess can be carried over to the next year or the seller can apply for a tax refund/tax credit certificate from the BIR within 2 years from the date of payment.
Is CWT required even if the seller is tax-exempt?
Generally no. If the seller is a tax-exempt entity (e.g., a government agency or PEZA-registered entity with income tax holiday), the buyer should not withhold CWT. However, the buyer must require proof of the seller's tax-exempt status (e.g., BIR ruling, Certificate of Tax Exemption) before releasing the full payment without withholding.