Are you a foreigner with rental income in the Philippines? You may be subject to tax.
One of the greatest advantages of having areal estate propertyis you can rent it out if you don’t wish to live there. Thus, you can also earn a profitable income from your invested residential property. However, it is also mandatory to pay taxes, regardless of your nationality and residential status.
So if you are a foreigner who owns a house and lot Philippines and rent it out, you should be aware of the Rental Income Tax Law.
Understanding the Rental Income Tax Law
As amended and governed by the National Internal Revenue Code of 1997 (Tax Code), the rental income tax law is a set of laws that governs the taxation of rental income earned by an individual from real estate located in the Philippines.
A rental income is subject to income tax at the following rates:
Resident citizens: 25 percent of the gross rental income.
Resident aliens: 32 percent of the gross rental income.
Non-resident aliens: 35 percent of the gross rental income.
Additionally, some deductions and allowances can be claimed to reduce the taxable income from rental properties. These deductions and allowances include:
Depreciation of the property
Repairs and maintenance costs
Property taxes
Interest on mortgage loans
Management fees
Now, the rental income tax law also provides for a withholding tax on rental payments. The creditable withholding tax rate is 5 percent of the gross rental payment. The person who pays the rental income is called the withholding agent, such as the landlord or the property manager.
Who Should Pay Rental Income Tax?
Any individual who owns a property and receives rental income will pay rental income tax. But there are some exceptions to this rule. For example, if the property is owned by a corporation or classified as a capital asset, the corporation is responsible for paying the tax. Similarly, if the property is owned by a trust, then the trust is responsible for paying the tax.
Furthermore, the tenant may also be responsible for paying some of the rental income tax in some cases. For instance, if the tenant is a non-resident alien, they may be responsible for paying a portion of the rental income tax.
When to File Rental Income Tax?
You must file your rental income tax with the Bureau of Internal Revenue (BIR) on or before April 15 of the following year. The tax return must be accompanied by a payment of the tax due. So, if you receive rental income in 2023, you must file your tax return and pay the tax due by April 15, 2024.
But, if you are a resident alien who receives rental income from a property located outside of the Philippines, you have until June 15 of the following year to file your tax return and pay the tax due.
If you fail to file your tax return or pay the tax due by the deadline, you may be subject to penalties.
When paying rental income tax in the Philippines, the requirements are as follows:
Tax return form:You must file Form 1701Q, which is the annual income tax return for individuals and non-resident aliens who receive rental income.
Proof of income:You need to provide proof of your rental income, such as copies of your lease agreements, rent receipts, and bank statements.
Proof of expenses:You also need to provide proof of your allowable deductions, such as copies of your receipts for repairs and maintenance, property taxes, and interest on mortgage loans.
Payment of tax:You must also need to pay the tax due on your rental income. You can pay the tax online, through the BIR's electronic payment system, or at any authorized bank or payment center.
How to Calculate Your Rental Income Tax?
To calculate your rental income tax in the Philippines, follow these steps:
1. Calculate your gross rental income.It is the total amount of rent you receive from your rental property in a year.
2. Deduct your allowable deductions.These are expenses that you can deduct from your gross income to reduce your taxable income. Allowable deductions include expenses such as depreciation, repairs and maintenance, property taxes, and interest on mortgage loans.
3. Apply the tax rate.The tax rate for rental income in the Philippines is 25 percent for resident citizens and resident aliens and 35 percent for non-resident aliens.
4. Calculate your rental income tax.This is the amount of tax you owe on your taxable income.
Here is an example of how to calculate rental income tax in the Philippines:
Gross rent income: ₱100,000
Allowable deductions: ₱20,000
Taxable income: ₱80,000
Tax rate: 25%
Rental income tax: ₱20,000
Things to Remember When Filing Rental Income Tax in the Philippines
Foreigners earning rental income from Philippine properties may be subject to different tax types, depending on their specific circ*mstances. These are the things you need to keep in mind before submitting your tax return.
Percentage Tax
This tax is imposed on gross rental income received by individuals and corporations. For foreigners, the applicable percentage tax rate is 3 percent of the gross amount received from rental payments. This tax is final and is not subject to income tax.
Capital Gains Tax
If a foreigner decides to sell a real property in the Philippines, a Capital Gains Tax is imposed on the gain from the sale. The tax rate is 6 percent of the property's gross selling price or fair market value, whichever is higher. If the real estate property is considered an ordinary asset, the gain is subject to the regular rental income tax rate instead of the Capital Gains Tax.
Value Added Tax (VAT)
Certain rental transactions may also be subject to VAT. If the gross rental income exceeds the VAT threshold (currently PHP 3,000,000 per year), the lessor is required to register for VAT and charge 12 percent VAT on the rental payments.
Local Business Tax
In addition to national taxes, some local government units (LGUs) impose a Local Business Tax on the gross rental income generated within their jurisdiction. The rate and regulations vary depending on the specific city or municipality where the rental property is located.
Compliance and Regulations
Foreigners must stay updated with the current tax laws, regulations, and Revenue Memorandum Circulars issued by the Bureau of Internal Revenue. This ensures accurate reporting of income and expenses, proper calculation of taxes, and overall compliance with tax obligations in the Philippines.
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