Over view of buying real estate in the philippines 1 14-15

Buying Real Estate In The Philippines

Presented by: Robert L. Wolff, Esq.P.O. Box 381

Dumaguete City, Negros OrientalPhilippines 6200

[email protected] (518) 325-6015PH 09266485273

Disclaimer

I am not an attorney admitted to practice law in the Philippines. I am an attorney admitted to practice law in New York. Fortunately I have a friend who is a Philippine lawyer that can give advice.The following is not legal advice, but rather comments and observations.For answers to legal issues raised by this presentation, you need to consult an attorney admitted to practice law in the Philippines.

Where Are Retirees Retiring

The Philippines is one of the top retirement destinations in the world for retirees.

Many of the retirees that move to the Philippines would prefer to own their homes, rather than rent.For a non-citizen, the Philippines restrict their ability to own real state.Unfortunately, these restrictions can create problems for a non-citizen attempting to acquire real property in the Philippines.Before they buy property, non-citizens should take the time to understand the real property rules of the Philippines.

Right to Own Philippine Property

The right to own real property in the Philippines is not the same as in the United States (U.S.). As a general rule, in the U.S., anyone can purchase real property – citizen and non-citizen. This is not the case in the Philippines. There are limitations placed on a non-citizen’s ability to buy real estate. The following is a summary of the more important rules applicable to the purchase of real estate in the Philippines.

What is the Constitutional provision on foreign ownership of land in the Philippines

Section 7, Article XII of the 1987 Constitution states - Save in case of hereditary succession, no private lands shall be transferred or conveyed except to individuals, corporations or associations qualified to acquire or hold lands of the public domain.

General Rule- only a Filipino Citizen, or a Corporation or Partnership at least 60% of the capital of which is owned by Filipinos, or a Trust with a Philippine Trustee are entitled to acquire land in the Philippines.

What is the purpose for this Constitutional prohibition?

The primary purpose of the Constitutional provision is to preserve real property in the Philippines for Filipino Citizens.

Note - the Supreme Court in the case of “United Church Board for World Ministries v. Sebastian” reiterated the consistent ruling that if land is invalidly transferred to an alien who subsequently becomes a Filipino citizen or transfers it to a person or entity qualified under the Philippine constitution to own real property, the flaw in the original transaction is considered cured and the title of the transferee is rendered valid.

This is a very important legal point.

What are the exceptions to the restriction on foreigners’ acquisition of land in the Philippines?

1. Purchase by a former natural-born Filipino citizen subject to the limitations prescribed by Batas Pambansa 185 and R.A 8179

2. Acquisition before the 1935 Constitution

3. Purchase of not more than 40% interest in a condominium project

4. Acquisition through hereditary succession if the foreigner is a legal or natural heir

5. Special Visas(SRRV) for foreigners allowing 100% condo and townhouse ownership

6. Filipinos who are married to aliens who retain their Filipino citizenship, unless by their act or omission they have renounced their Filipino citizenship

What is meant by ownership on the basis of hereditary succession?

When foreigner is married to a Filipino citizen, and the Filipino spouse dies, the non-Filipino as the natural heir will become the legal owner of the property subject to the Compulsory Heir Rule. Under the compulsory heir rule, other heirs may share in the ownership of the property. Children, as legal heirs, may also own real property even if he or she does not hold Filipino citizenship.

Hereditary Succession refers to intestate succession where the person dies without leaving a Last Will and Testament.

The Hereditary Succession rules do not apply to the transfer of land by a Last Will and Testament. As a result, title to real property can not be transferred by will to a non- citizen spouse. Note, a trust can avoid this problem.

Land ownership by former Filipino citizens?

At one time, Filipinos who were naturalized as U.S. citizens were deemed to have lost their Filipino citizenship.

Now, former Filipinos who became naturalized citizens of foreign countries are deemed not to have lost their Philippine citizenship. Thus they can enjoy all the rights and privileges of a Filipino regarding land ownership in the Philippines.

Torrens System

The Torrens system of land registration is used in the Philippines. The Torrens system was adapted to assure a buyer that if he buys a land covered by an Original Certificate of Title (OCT) or the Transfer Certificate of Title (TCT) issued by the Registry of Deeds, the same will be absolute, indefeasible and imprescriptibly.

Note - the registration of the land under Torrens system in the name of one person does not bar evidence to show that the land is owned by another person. For example, the land is held in trust for another.

Deed

The Deed of Absolute Sale is the document showing legal transfer of real estate proper ownership. The Deed of Absolute Sale is then taken to the Registry of Deeds to be officially recorded AFTER paying the documentary stamp, transfer tax and registration fees. The Registry of Deeds will then issue a Certificate of Title.Always verify from the Registry of Deeds the authenticity of a Transfer Certificate of Title before buying a property.If the seller only has tax declaration, be extra cautious and check with neighbors, the Barangay captain or anyone in the community to verify the seller’s/owner’s true identity and property history.

Documents Needed To File Deed

Documents needed when transferring the title to the new owner:Certified true copy of the certificate of titleNotarized copies of the Deed of SaleLatest tax declaration for the propertyCertificate from the Bureau of Internal Revenue that the capital gains tax and documentary stamps have been paidReceipt of the payment of the transfer tax and registration feesBirth certificate of Buyer. Depending where the property is located, there may be other requirements.

Closing Cost for Purchase of Real Estate

This is the standard sharing of expenses between the buyer and the seller when transferring the real estate property title (TCT-Transfer Certificate of Title or CCT- Condominium Certificate of Title) to a new owner. As a general rule, the SELLER pays for the:Capital Gains Tax equivalent to 6% of the selling price of the Deed of Sale or the zonal value, whichever is higher. (Withholding Tax if seller is a corporation.)Unpaid real estate taxes due (if any).Electric, water, interest, etc. bills.Agent’s/Broker’s commission.The BUYER pays for the cost of registration:The Documentary Stamp Tax-1.5% of the selling price or zonal value or fair market value, whichever is higher.Transfer Tax- 0.5% of the selling price, or zonal value or fair market value, whichever is higher.Incidental and miscellaneous expenses incurred during the registration process.

Standard Practice

The above sharing of expenses is the standard practice in the Philippines. However, buyers and sellers can mutually agree on other terms as long as it is done during the negotiation period (before the signing of the Deed of Sale). It is often advisable for the buyer to have some of the purchase price held in escrow to cover the seller’s expenses not paid at closing.

For example, to pay the capital gains tax if being paid by the seller.

Calculation of Tax

In the Philippines, the tax is based on the gross selling price or zonal value (current fair market value) whichever is higher.The capital gain from the sale of a principal residence can be deferred if the sale proceeds are fully used for the acquisition or construction of a new principal residence within 18 months of the date of sale.

This exemption can be used only once every ten years. This exemption does not apply to the purchase of a

principal residence prior to sale. The adjusted basis or cost of the property is its cost plus,

expenses of acquisition

Registration Process

If you are not doing it yourself, be sure to get someone who knows what they are doing help you with the registration process (sometimes for a fee). Watch out for lost titles, right of way issues and so-called FIXERS. Many Fixers will take your money and not do what they said they would do. As a result, there may be a long delay in receiving your title.

What are the property rights of a foreigner married to a Filipino citizen?

1. A foreigner can legally own a house or building in the Philippines as long as he or she does not own the land on which the structure is built.

2. Title to the house or building can be a document like Deed of Sale, can contain the name of the foreigner-spouse, except for the title to the underlining land.

Foreigner Married To Or Living With A Philippine Citizen

When a foreigner buys real property in the Philippines, caution should be taken when considering taking title to Philippine real estate in the name of the Philippine spouse or girlfriend. In the event of problems with the Philippine spouse or girlfriend, the foreign national may have limited rights to the assets or none at all. The law is not always fair.

This is why foreigners often use leases, corporations, trusts and other legal documents to protect their financial interest in real estate purchased in the Philippines.

For Leasing of Philippine Real Estate Property

A foreign person, corporation and or trust may enter into a lease agreement with Filipino landowners for an initial period of up to 25 years, and renewable for another 25 years.

Main drawback to a lease you do not acquire ownership of the property.

Using a Philippine CorporationTo Buy Real Estate

To take ownership to a private land, residential house and lot, commercial building and lot, foreign persons or corporations can form a Philippine corporation.

The corporation is to be 40% foreign-owned (maximum) and 60% Filipino-owned (minimum), and not less than 5 incorporators and 5 directors who are Filipino.

There must be a stated amount of paid in capital, in the bank account of the corporation when applying for approval of the incorporation of the corporation.

A foreign national may be sole person on the bank account, allowing him or her control ( in my opinion limited control) over the funds derived from the corporation and the income or sale of the assets or property.

There are other requirements not discussed herein.

Trusts and Asset ProtectionThere are many good reasons to create a trust to hold real estate and other assets in the Philippines, such as;

If the Trust is funded prior to marriage to a Filipino or Filipina, assets are not subject to the Philippine Absolute Community Property Rules that treat one half of the assets owned prior to marriage, as owned by the new spouse when they say I DO.

A Trust avoids having to put title to real property in the name of a girlfriend, wife, third party or corporation.

A Trust provides Asset Protection and avoids probate.

Using a TrustMost attorneys in the Philippines do not use a Trust to allow a foreign-citizen to acquire real property in the Philippines, but if the trustee of a trust is a Filipino or Filipino entity, the law allows the trust to hold real estate.

The law only requires that the controlling trustee be a Philippine citizen, which can be an individual or an entity.

Often the trust is done in conjunction with tax, estate and asset protection planning.

Don’t forget, there are forms you may need to file the IRS if you are a U.S. citizen creating a trust in the Philippines.

Options to Acquire Real Property

Put title of the real property in the name of your wife, girlfriend or third party. In the event of problems with the Philippine spouse or girlfriend, you may have limited rights to the real property or none at all.

Lease the property. Problem with a lease is that there is no benefit from future appreciation of the property. If you own the property, you benefit from the future appreciation.

Create a corporation. Need to meet the limitations of non-citizen ownership of corporations in Philippines, such as the 40/60 equity ownership rule, five Filipino directors, etc. The sanme basic rule applies if a partnership is used.

Create a trust to purchase the property. Need a Philippine Trustee-individual or corporation. An advantage of a trust is that it can also be used for asset protection planning and as a means of avoiding probate.

There are other options not discussed herein.

Something to Think About – An Investment Trust

An Investment Trust is designed to pool the money of several individuals for the purpose of making an investment.

For example, five individuals pool their money to buy a piece of real property, the trust then improves and sub-divides the property, which is then sold as individual lots.

The trust provides a way to spread the cost of an investment among several investors and a way to share profits.

INVESTMENT TRUST

Beneficiaries contributeproperty

Investment Trust

Trust makes Investments

Trust distributes profits to Beneficiaries

What can the trust invest in:•Land•Buildings•Businesses•Stocks and Bonds•Most anything an individual could invest in

INVESTMENT TRUST USING A LIMITED PARTNERSHIP

Beneficiaries contribute property

Investment Trust

Trust makes Investment in Limited Partnership

Trust distributes cash and property to Beneficiaries

Limited Partnership

Limited Partnership Makes Investments And Distributes Profits to trust

What can the trust invest in:

•Land •Buildings •Businesses •Stocks and Bonds •Most anything an individual could invest in

INVESTMENT TRUST USING A CORPORATION

Beneficiaries contribute property

Investment Trust

Trust makes Investment in Corporation

Trust distributescash and property to Beneficiaries

Corporation

Corporation makes Investments And DistributesProfits to Trust

What can the trust invest in:

• Land • Buildings • Businesses • Stocks and Bonds • Most anything an individual could invest in

What To Do When Things Go Bad with;

The Wife The Girlfriend A Third Party Holding the Title of the Real

Property

You Need To Protect Yourself First, an ounce of precaution is worth a pound of

cure. Take the time to understand how Philippines laws

applies to you and what options you have to protect yourself.

Trust may be your best option for assets protection and to acquire real property.

If the real property is all ready in the name of the wife, girl friend or third party, you may still be able to recover your property through legal action.

Yes, a foreigner can win their case in a Philippine court.

Reasons to Create a Trusts

avoidance of probate of assets in the Philippines and else when property or assets are held by the trust, you do not have to put the title of real property in the name of your girlfriend, wife or a third party.asset management, asset protection, and anInvestment tool.

IRS Circular 230

Pursuant to Internal Revenue Service Circular 230, we hereby inform you that the advice set forth herein with respect to U.S. federal tax issues, or other legal issues were not intended or written by Robert L. Wolff to be used as legal advice, and cannot be used by you or anybody else for the purpose of (i) avoiding any penalties that may be imposed on you or any other person under the Internal Revenue Code (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein or (iii) as legal advice. You are advise to seek advice based on your particular circumstances from an independent tax advisor or attorney.