The Basic Taxes Involved in a Sale of Real Estate Property

Learn the tax types applicable and/or relevant to the 1031 Exchange so that you won't be caught blindsided in case you choose to file without the help of experts.

One of the aspects of real estate that many people find most confusing is what taxes are involved in a sale of a property, and it is easy to see why. While the exact taxes you will need to pay will depend on various factors including the state where you live and what part you play in the sale and purchase, there are some basic taxes that are involved in pretty much all real estate transactions.

Taxes that the seller is responsible for

If you are selling your home, the basic taxes that you will be responsible for include:

Income tax (assuming the property is to be sold as an ordinary asset)

The proceeds from the sale of your home should be included in your overall annual income under the IRS code ‘other income’, and this means that it is subject to 30% regular income tax or a graduated tax rate at a maximum of 32% if the seller is an individual. If you are a corporation, this will be charged at 2% minimum corporate income tax.

Value added tax

If you are engaged in the business of selling, developing, leasing or sub-leasing property then your sale will also be subject to 12% value added tax. However, certain value thresholds are applied meaning that some properties may be VAT exempt depending on their valuation. Those real estate sales that are exempt from VAT based on thresholds may still be subject to a 3% percentage tax.

Capital gains tax

The sale of a main residence is exempt from capital gains tax subject to certain rules and restrictions. However, if you own a vacation home or second property, you can expect to pay a tax of around 6% based on the highest value among the selling price, BIR zonal value and the assessed value by the city assessor or equivalent.

Documentary stamp tax

This is an additional tax levied on the paperwork side of a real estate transaction, including loan agreements, and papers, sale or transfer of an obligation etc. The amount of tax you will pay is 1.5% based on the highest value among the selling price, BIR zonal value and the assessed value by the city assessor or equivalent.

If you are buying a home, you will be responsible for two taxes. These are:

Transfer tax

This relates to the taxes imposed on any mode of conveying the ownership of real estate from one part to another, whether it be through sale, donation, probate etc. The amount you will be liable for will depend on the location of the property and local rules and regulations.

Is there any way I can avoid the taxes involved in the sale of a real estate property?

Fortunately, yes! There is a way that you can sell sax free. A 1031 exchange is a completely legal IRS process that enables you to save between 30-40% in taxes on the profits from your sale. You must hire a 1031 accommodator and complete your sale within certain guidelines – and that is something that we can help you with. When you do a 1031 exchange you simply defer paying the tax that you would have paid on the profit for your current property, and this enables you to invest the sum into your new property purchase. Essentially it is like an interest-free loan from the government!

Ready to get started?

We know that 1031 exchanges, real estate financing, and everything in between can be confusing, and a 10 minute phone call can help clear things up. So give us a call or schedule a consultation today, and we’ll be happy to talk through your specific needs.