LEGAL ASPECTS OF SALE

CONTRACT OF SALE – One of the contracting parties obligates himself to

transfer the ownership of and to deliver a determinate thing, and the other to
pay therefor a price certain money or its equivalent. A contract of sale may be
absolute or conditional.

SALES

1. Contract of sale (absolute)

 real obligation – obligation to give

 remedies available:

a. specific performance

b. rescission

c. damages

2. Contract to sell (conditional)

 personal obligation – obligation to do

 remedies available:

a. resolution

b. damages

ESSENTIAL REQUISITES OF A CONTRACT OF SALE

1. consent

2. subject matter
3. price

CHARACTERISTICS OF CONTRACT OF SALE:

1. Nominate - law gave it a name

2. Principal - can stand on its own; unlike accessory contract

3. Bilateral - imposes obligation on both parties

a. obligation of seller – transfer ownership & deliver

b. obligation of buyer – pay for price

Consequence: power to rescind is implied in bilateral contracts

4. Onerous – with valuable consideration

 Consequence: all doubts in construing contract to be resolved in greater

reciprocity of interest

5. Commutative – equal value is exchanged for equal value

 Test: subjective – as long as parties in all honesty that he is receiving equal

value then it complies with test & would not be deemed a donation; but must
not be absurd.

 Inadequacy of price or aleatory character not sufficient ground to cancel

contract of sale; inadequacy can show vitiation of consent & sale may be
annulled based on vice but not on inadequacy

6. Consensual – meeting of minds makes a perfect contract of sale but needs

delivery to consummate.

7. Title & not a mode – gives rise to an obligation to transfer; it is delivery w/c
actually transfer ownership; mode which actually transfer ownership.
STAGES IN LIFE OF CONTRACT OF SALE:

1. negotiation

2. perfection – by mere consent; performance may be demanded ( specific

performance )

3. consummation

DISTINGUISHED FROM OTHER CONTRACTS:

1. Donation

 donation is gratuitous; sale is onerous

 donation is formal contract; sale is consensual
 donation is governed by law on donation; sale is governed by law on sales

2. Barter
 in barter, the consideration is the giving of a thing; in sale, it is giving of
money as payment
 both are governed by law on sales; both are species of the genus sales
 if consideration consists party in money & partly by thing – look at manifest
intention; if intention is not clear (1468 ):
a. value of thing is equal or less than amount of money – sale
b. value of thing is more than amount of money – barter

3. Contract for piece of work

 test in article 1467:
a. contract for delivery of an article which the vendor in the ordinary course of
business manufactures or procures for general market ( whether on hand or
not ) – sale
b. goods are to be manufactured specially for a customer and upon special
order and not for the general market – contract for piece of work.
 jurisprudence:
a. Timing test – under art 1467; Inchausti; whether the thing transferred would
have never existed but for the order – contract for piece of work (abandoned)
b. Habituality test – enunciated in Celestino v CIR; contract of sale if
manufacturer engages in activity without need to employ extraordinary skills
and equipment; contract for piece of work is sale of service; contract of sale is
sale of things.

c. Nature of the object test – enunciated in EEI v CIR; each product’s nature of
execution differs from the others; products are not ordinary products of
manufacturer.

 main factor in decision of the SC: essence of why parties enter into it:

a. essence is object – contract of sale

b. essence is service – contract for piece of work

4. Agency to sell

 in sale, buyer pays for price of object; in agency to sell, agent not obliged to
pay for price, merely obliged to deliver price received from buyer.

 in sale, buyer becomes owner of thing; in agency; principal remains owner

even if object delivered to him

 in sale, seller warrants; in agency, agent assumes no risk/liability as long as

within authority given

 in sale, not unilaterally revocable; in agency, may be revoked unilaterally

because fiduciary & even w/o ground

 in sale, seller receives profit; in agency, agent not allowed to profit

 TEST: essential clauses of whole instrument ( art 1466 – motherhood

statement, not good law )

 Agency is a personal contract; sale is real contract ( to give ) – rescission not

available in agency

5. Dacion en pago

 dacion: contract where property is alienated to satisfy/extinguish obligation

to pay debt
 in dacion: novates creditor-debtor relationship into seller-buyer

 in dacion: delivery is required ( real contract )

6. Lease

 in sale: obligation to absolutely transfer ownership of thing; in lease: use of

thing is for specified period only with obligation to return

 in sale: consideration is price; in lease: consideration is rent

 in sale: seller needs to be owner of thing to transfer ownership; in lease:

lessor need not be owner

 lease with option to by: really a contract of sale but designated as lease in
name only; it is a safe by installments
CHAPTER 2: PARTIES TO A CONTRACT OF SALE
GENERAL RULE: All parties with capacity to contract can enter into a valid
contract of sale

1. Natural
2. Judicial - corporation/partnership/associations/Cooperatives

 Status of contract valid

 Remedies available therefore are:

a. specific performance

b. rescission

c. damages

EXCEPTION TO GENERAL RULE:

1. Minors

 status of contract: voidable only, therefor ratifiable

 remedy is action for annulment (with partial restitution in so far as the minor
is benefited)

2. SALE BY & BETWEEN SPOUSES

a. Contract with 3rd parties

 status of contract is valid

b. Sale between parties

 Status not provided for by law but VOID according to case law

 Reason:

i. prevent defraudation of creditors

ii. avoid situation where dominant spouse take advantage of others

iii. avoid circumvention on prohibition of donation between spouses

 Exception

i. separation of property agreed (marriage settlement)

ii. judicial separation of property

c. Common Law Spouses (Paramours)

 Status of contract: VOID (per case law)

 Rationale: evil sought to be avoided is present

3. OTHERS PER SPECIFIC PROVISIONS OF LAW

a. Guardian with regards to property of ward during period of guardianship

b. Agent with regards to property of principal

c. Executor/administrator with regards to the estate of the deceased

d. Public officers with regards to the property of the estate

e. Officer of court & employee – with regards to property in litigation

LEGAL STATUS OF CONTRACT:

1. VOID (PER CASE LAW) – guardian/ executor/public officers / officers of the

court

2. VOIDABLE (PER CIVIL CODE) – agent; and if with consent, VALID

TWO GROUPS OF PROHIBITED PARTIES FROM ENGAGING IN CONTRACT OF

SALE:

1. Guardian / Agent / Executors – ratifiable in the sense that only private wrong
is involved

2. Public Officials / Officers of Court – not ratifiable in the sense that public
wrong is concerned

GUARDIAN/AGENT/ADMINISTRATOR

1. Legal status of contract: VOID (case law)

2. Direct or indirect

3. If mediator – no need to prove collusion; inutile

4. Even if court approved sale

5. Reason: fiduciary relationship is based on trust

ATTORNEYS

REQUISITES:
1. Lawyer-client relationship exists

2. Subject matter – property in litigation (all types)

3. Duration – while in litigation (from filing of complaint to final judgment); may

be future litigation

 Reason: due to public policy; ground for mal practice

a. Client is at the mercy of the lawyer

b. Law is a noble profession

c. 2 Masters – 2 interest; one cannot serve 2 masters at the same time

 Exception: CONTINGENT FEE ARRANGEMENT

a. Amount of legal fees is based on a value of property

b. Property itself is involved

 Not a sale but service contract

 I give that you may do (innominate contract) so has to be governed by law on

sales but because of public policy, considered VALID

 Reason why contingent fee is followed:

i. constitutional prohibition v impairment of contract

ii. subject to control of courts (may be reduced if unconscionable or nullified)

iii. canons of legal ethics

iv. higher public policy litigants

CHAPTER 3: SUBJECT MATTER OF SALE

TO BE A VALID & BINDING SUBJECT MATTER, THE FOLLOWING MUST
CONCUR:

1. Existing, Future & Contingent

2. Licit

3. Determinate or determinable

EXISTING, FUTURE, CONTINGENT

 Refers to subject matter that are existing & not existing but capable of
existence (pursuant to present, technology)

1. if this is present, status of contract: VALID

2. if absent : NO CONTRACT SITUATION, THEREFORE NO CAUSE OF ACTION

3. if mere pipe dream : VOID

a. SALE OF THINGS HAVING POTENTIAL EXISTENCE (Emptio Rei Speratae)

 Sale of future things; no physical existence yet

 A resolutory condition that thing will come into existence

 Non happening of condition: RESULUTORY: EXTINGUISH THE CONTRACT

 Remedy: can recover what has been paid

b. SALE OF HOPE (Emptio Spei)

 Every sale of future thing is subject to condition that they will come into
existence

 If hope does not come true – NO RECOVERY OF PAYMENT/NO RESCISSION

 Aleatory character but valid

LICIT & VENDOR MUST HAVE A RIGHT TO TRANSFER SUBJECT MATTER

1. LICIT – must be within the commerce of men

 VOID SUBJECT MATTER:

a. Contrary to law

b. Simulated/fictitious

c. Did not exist at a time of transaction

d. Outside commerce of men

e. Impossible service

f. Intention can not be ascertained

g. By provision of law

2. SELLER MUST BE OWNER – only at a time of consummation since tradition

transfers ownership but to have a perfected contract of sale, Vendor need not
be owner of thing; can be validated/ratified by subsequent acquisition of title
by seller

DETERMINATE & DETERMINABLE

 Absence: VOID; there is subject matter but Intention regarding subject matter
can not be ascertained – VOID

 Kinds of subject matter:

1. Specific - Determinate

 Particularly designated or segregated from all others of the same class

2. Generic - Determinable
SOURCE: Ateneo De Manila University College of Law

 Test: reach a point of description where both minds concur

 At the time the contract is entered in to the thing is capable of being made
determinate without the necessity of a new or further agreement between
parties

 Exact quantity not essential

 Sale of generic things – VALID; still executory

 There can only be contract of sale when subject is finally chosen for delivery –
already segregated or designated; but before designation, valid K of sale
already exists

3. Undivided interest (BUYER becomes co-owner)

4. Undivided share in mass of fungible goods (BUYER becomes co-owner)

CHARTER 4: PRICE – signifies the sum stipulated as equivalent of the thing

sold

CHARACTERISTICS OF VALID PRICE

1. Must be real

2. Must be in money or its equivalent

3. Must be certain or ascertainable at the time of the perfection of the

contract

4. Manner of payment provided for

REAL

1. When price stated is one intended by parties

 If fictitious: no intention with respect to price - VOID

 If False/simulated: what appears in contract is not the true price

a. VALID if there is true consideration

b. VOID but if none (because it is fictitious)

2. Valuable

 When not valuable – VOID

 When contract is onerous, presumed to have valuable consideration

 Nominal consideration w/c is common law concept does not apply (P1.00)

 Gross inadequacy of price in ordinary sale does not render contract void
unless it is shocking to conscience of man.

Except:

a. Judicial sale

 Shocking to conscience of man

 Higher price can be obtained at re-sale

b. Rescissible contracts due to lesion

c. Sales with right to repurchase (raises presumption of equitable mortgage) –

Remedy is reformation

CERTAIN OR ASCERTAINABLE

CERTAIN

1. Sufficient that it is fixed with reference to another thing certain

 That thing will have on a definite day, or in a particular exchange or market,
or when an amount is fixed above or below the price on such day, or in such
exchange or market provided said amount be certain

2. Determination be left to judgment of specified person/s

 If contract states that price is to be determined by 3rd party, contract is

already perfected (there is just a suspensive condition – actual fixing of price)

 3rd party fixes price in bad faith or mistake – court remedy can be made

 3rd party is unable or unwilling to fix price – parties have no cause of action

 Reason:

a. suspensive condition does not happen yet – courts have no jurisdiction

b. enforceable contract have not yet arisen – court with no jurisdiction to

create contract between parties

 Result: INEFFICACIOUS

 When price can not be determined in accordance with any of the preceding
rules, contract of sale in INEFFICACIOUS

 However, when SM delivered, BUYER must pay reasonable rice therefore –

court can fix price

MANNER OF PAYMENT MUST BE AGREED UPON

 Deemed to be an essential requisite because it is part of the presentation of

the contract

 Integral part of concept of price

 If there is failure to meet minds as regards term of payment: CASH BASIS

 Must be certain or at least ascertainable

 Effect is absent: NO CONTRACT SITUATION

CHAPTER 5: FORMATION OF CONTRACT OF SALE

3 STAGES IN LIFE OF A CONTRACT OF SALE

1. Policitacion/negotiation Stage – offer is floated, acceptance is floated but

they do not meet; time parties indicate their interest but no concurrence of
offer & acceptance

2. Perfection – concurrence of all requisites; meeting of the minds

3. Consummation – parties perform their respective undertakings

POLITIACION

1. offer is floated but not absolute

2. acceptance is likewise floated but conditional

RULES:

1. offer is floated – prior to acceptance, may be withdrawn at will by offeror

2. offer floated with a period – without acceptance, extinguished when period

has ended & maybe withdrawn at will by offeror; right to withdrawn must not
be arbitrary otherwise, liable to damage under Art 19, 20, 21 of civil code

3. offer floated with a condition – extinguished by happening/non-happening of

condition

4. offer floated without period/without condition – continues to be valid

depending upon circumstances of time, place & person

5. offer is floated & there is counter-offer – original offer is destroyed, there is a

new offer; can not go back to original offer
6. offer is floated – no authority of offeror to modify offer

7. offer is accepted absolutely – proceed to perfected stage

OPTION CONTRACT

 floats in the policitacion stage

 offer with a period but founded upon a separate consideration distinct from
the price

 no presumption of consideration, needs to be proven

 Characteristics:

a. not the contract of sale by itself, distinct

b. nominate

c. principal; but can be attached to other principal contracts

d. onerous

e. commutative

f. unilateral – vs contract of sale which is bilateral

 to be perfected & give rise to action, the following must concur

a. subject matter of sale must be agreed upon

b. price of sale & manner of payment must be agreed upon

c. consideration separate & distinct from price

d. period – as per contract; if period not provided – prescribes in 10 years

(written contract)
e. how exercised: notice of acceptance should be communicative to offeror
without actual payment as long as there is delivery of payment in
consummation stage

2 SITUATIONS IN AN OPTION CONTRACT:

1. with separate consideration

 Legal consequence:

a. option contract is valid

b. offeror can not withdrawn offer until after expiry period

c. subject to rescission, damages but not to specific performance because this

is not an obligation to give

2. without separate consideration

 Legal consequence:

 OLD RULE:

a. offer is still valid, but

b. option contract is void

c. not subject to rescission, damages

 NEW RULE: Right if first refusal recognized

RIGHT OF FIRST REFUSAL:

 creates a promise to enter into a contract of sale and it has no separate

consideration, not subject to specific performance because there is no
contractual relationship here & it is not an obligation to give (not a real
contract)
 New doctrine: may be subject to specific performance

 Effect of new doctrine: turned the world of policitacion upside down because
while valid option contract is not subject to specific performance, right of first
refusal which does not even have a separate consideration may be subject to
specific performance

OPTION CONTRACT & RIGHT OF FIRST RIGHT OF FIRST REFUSAL

REFUSAL DISTINGUISHED OPTION
CONTRACT
Principal contract; stands on its own Accessory; can not stand on
its own
Needs separate consideration Does not need separate
consideration
Subject matter & price must be valid There must be subject matter
but price not important
Not conditional Conditional
Not subject to specific performance Subject to specific
performance
Republic Act 9653
Republic Act 9653, known as the Rent Control Act of 2009, protects tenants from
unreasonable rent increases and provides the eviction rules that both landlords
and tenants must observe.
The law covers housing units with a monthly rent of up to Php 10,000 in Metro
Manila and other highly urbanized cities. The following are the specific rental
properties that are covered by the Rent Control Act:

 Apartments
 Boarding houses, bed spaces, dormitories, and rooms for rent
 Houses and/or land

Landlords and renters who are proven to violate the law shall pay fine of PHP
25,000 to PHP 50,000 or be imprisoned for one month and one day to six
months, or both.
Basic rights of a tenant
1. Limit on Rent Increases
Landlords cannot increase the rent by more than what the law allows. The
Housing and Urban Development Coordinating Council (HUDCC), a government
agency that regulates residential leases in the Philippines, has set the rental
increase limits based on the Rent Control Act.
Until how much can landlords increase their rent?

Monthly Rent Maximum Rent Increase

PHP 4,999 and below 2% (only once per year)
PHP 5,000 to PHP 8,999 7% (as long as the unit is occupied by the same
tenant)
PHP 9,000 to PHP 11% (as long as the unit is occupied by the same
10,000 tenant)
Before you sign a lease agreement, check if it has any provision on rent
increase. If it does, it should be within the legal limit.
Also, the Rent Control Act allows landlords to increase rents only once a year for
bedspaces, boarding houses, dorms, and rooms leased to students. In this case,
no rent increase can be charged twice or more per year even if a new tenant
moves into the unit within the same year.
2. No Charging of Excessive Deposit and Advance Rent
Under the Rent Control Act, landlords can only collect not more than two-month
deposit and not more than one-month advance rent.
The rental law also requires them to keep the deposit payment in a bank account
under the landlord’s name throughout the duration of the lease agreement. When
the contract expires, the deposit and the interest it earned, plus any remaining
balance from the advance rent, should be returned to the tenant.
However, landlords can use the deposit and advance rent to compensate for
losses they incur when tenants fail to pay the rent, settle utility bills, and/or
causes damage to any part of the property.
3. No Eviction Without Legal Ground
If your landlord tells you to vacate the house, ask for the specific reason for the
eviction. You cannot be evicted for unjust reasons.
The decision to evict a tenant must be based on grounds specified by the rental
law in the Philippines. The Rent Control Act allows eviction only for any of the
following reasons:
Subleasing – The tenant rents out a portion or all of the unit to another person
without the property owner’s written consent.
Overdue rental payments – The tenant has not paid the rent for three months
or more.
Owner’s legitimate need to use the property – The landlord or his/her family
needs to occupy the unit. In such a case, the tenant can be evicted only after the
lease contract expires. The renter should also be given a formal notice to vacate
three months in advance.
Necessary house repairs – The landlord has to do necessary repairs on the
leased unit to make it safe and suitable to live in. When the repair is finished, the
evicted tenant should be the priority in leasing the unit.
Lease contract expiration – The landlord has the option not to renew the rental
agreement once it expires. This usually happens when the landlord wants to get
rid of unruly or delinquent tenants.
Renters in the Philippines cannot be asked to leave the leased property for any
of the following reasons:
1. Sale or mortgage of the property
Under the Rent Control Act, if the landlord has sold or mortgaged the leased unit
to a third party, the landlord or the new owner cannot evict the tenant.
2. If you’re a COVID-19 patient or frontliner
If you’re renting in a city with an anti-COVID-19 discrimination ordinance (such as
Makati, Manila, Muntinlupa, Pasig, and Quezon City), you shouldn’t be forced to
leave your rented unit or be denied of leasing if you’re suspected or infected with
COVID-19 or any infectious disease. The same goes for healthcare and
emergency workers.
3. Failure to pay rent and other reasons during the quarantine period and
grace period
Property owners cannot evict tenants in ECQ, MECQ, and GCQ areas from the
start of the quarantine until the end of the mandatory 30-day grace period (which
starts from the last due date of rent or from the lifting of the quarantine,
whichever is longer).
This rule, which is based on a Department of Trade and Industry (DTI)
memorandum circular[5] under the Bayanihan to Heal as One Act, applies to
residential tenants and commercial tenants in the MSME (micro, small, and
medium enterprise) industry that were banned from operating during the ECQ.
Under the DTI memo, no eviction is allowed even for tenants who fail to settle
their rent during the community quarantine. Landlords who refuse to comply with
the grace period could be fined at least PHP 10,000, jailed for at least two
months, or both.
All unpaid rents during the quarantine period can be settled in six monthly
installments—without any penalties, interests, fees, and other charges—after the
end of the grace period. According to the DTI, tenants who opt to do that should
give their landlord a promissory note or any letter stating their intention to pay the
overdue rents in installments.
Zoleta, V. (2020, September 23). Rental Law in the Philippines: Know Your
Rights As Tenant. Moneymax.
[Link]
Warm up exercise:

1. A duly registered and licensed natural person , who for a professional fee,
compensation, or other valuable consideration, performs or renders, or offers
to perform services in estimating and arriving at an opinion of or acts as an expert
on real estate values, such services of which shall be finally rendered by the
preparation of the report in acceptable written form:
a. Appraiser
b. Valuer
c. Real estate appraiser
d. Real estate assessor
KEYWORDS: Duly Registered and Licensed Natural Person, a
professional fee, compensation, or other valuable consideration,
performs or renders, or offers to perform services

2. A duly registered and licensed natural person who works in a local government
unit and performs appraisal and assessment of real properties, including plants,
equipments and machineries, essentially for taxation purposes:
a. Appraiser
b. Valuer
c. Real estate appraiser
d. Real estate assessor
KEYWORDS: Duly Registered and Licensed Natural Person,
LGU, both appraisal and assessment, taxation purposes.

3. A person who conducts valuation/ appraisal; specifically, one who possesses the
necessary qualifications, license, ability and experience to execute or direct the
valuation/ appraisal of the real property:
a. Appraiser
b. Valuer
c. Real estate appraiser
d. Real estate assessor
KEYWORDS: A person who conducts valuation/ appraisal

4. An appraiser is also known as

a. Appraiser
b. Valuer
c. Real estate appraiser
 d. Real estate assessor
KEYWORDS/CLUE: No words - Registered & Licensed

5. An official in the local government unit, who performs appraisal and assessment
of real properties, including plants, equipments and machineries, essentially for
taxation purposes:
a. Appraiser
b. Assistant assessor
c. City Engineer
d. Tax assessor
KEYWORDS: performs appraisal and assessment of real
properties

6. The Board shall have no less than two (2) members who shall
represent: a. Assessors and appraisers
b. Government assessors and appraisers (Section 4 of RA
9646)
c. Real estate assessors and real estate appraisers
d. Real estate brokers and real estate appraisers
KEYWORD/S: Board; no less than two (2) members

7. Process of estimating value which can also be performed by a non-licensed

property valuer:
a. Appraisal
b. Valuation
c. Estimation
d. Computation
KEYWORDS: estimating value

8. The owner of the property is the ________ in the mortgage

agreement a. Mortgagee
b. Mortgagor
c. Investor
d. Guarrantor
KEYWORDS/CLUE:
CODE O: The owner of the property (VendOr, MortgagOr)
A. Lesson: Principles (Level- Foundational)

Practice quiz:

1. The principle which states that the value of the property is equal to the cost of
producing an equally desirable comparable property:
a. Anticipation
b. Substitution
c. Contribution
d. Progression
KEYWORDS/CLUE: producing an equally desirable comparable
property

2. The principle which states that land can not be valued on a different basis than
the improvement:
a. Anticipation
b. Consistent use
c. Contribution
d. Conformity
KEYWORDS/CLUE:different basis than the improvement

3. The principle which states that the maximum value is achieved when land uses
are compatible and architectural harmony is present:
a. Confomity
b. Consistent use
c. Substitution
d. Anticipation
KEYWORDS/CLUE: compatible and architectural harmony

4. The principle which states that the best use of the land is the most probable
use which will most likely produce the greatest net return to the land over a given
period of time:
a. Highest and best use
b. Plottage
c. Contribution
d. Anticipation
5. The principle which states that real property goes into the process of wasting
away and eventually disintegrating:
a. Principle of Progression
b. Principle of Change
c. Principle of Four-Stage Life Cycle
d. Principle of Decreasing/ Diminishing Return

6. The principle which states that each property has one use that gives its
greatest value which is physically possible, financially feasible, legally permissible,
and most productive: a. Principle of Change
b. Principle of Progression
c. Principle of HABU
d. Principle of Anticipation

7. The principle which states that the value of the property is the present worth
of all present and future benefits. Value is created by anticipated future benefits
derived from the property:
a. Principle of Change
b. Principle of Progression
c. Principle of Balance
d. Principle of Anticipation

8. The worth of a lesser-valued object tends to be enhanced by association with

many similar objects of greater value:
a. Principle of Regression
b. Principle of Progression
c. Principle of Contribution
d. Principle of Anticipation

9. The principle most used by the Sales Comparison Approach:

a. Principle of Conformity
b. Principle of Substitution
c. Principle of Contribution
d. Principle of Anticipation
10. The principle most used by the Income Capitalization Approach:
a. Principle of Conformity
b. Principle of Substitution
 c. Principle of Contribution
d. Principle of Anticipation

11. The principle which states that the net income due to the added improvement
increases only until a certain point, after which, additional improvement will no
longer bring increases in income or value:

a. Principle of Contribution
b. Principle of progression
c. Principle of Increasing and Diminishing Returns
d. Principle of Change

12. The principle which recognizes value differential between alternative

investments with differing rates of return:
a. Principle of Contribution
b. Principle of Opportunity Cost
c. Principle of Change
d. Principle of Substitution

13. A principle which states that influences outside a property may have a positive
or negative effect on its value:
a. Principle of Contribution
b. Principle of Change
c. Principle of Surplus Productivity
d. Principle of Externalities

14. Property Value based on a particular use

a. Insurable value
b. Salvage value
c. Going-concern value
d. Value in use

15. The most probable price which a property should bring in a competitive and
open market under all conditions requisite to a fair sale, the buyer and seller each
acting prudently and knowledgeably, assuming the price is not affected by undue
stimulus: a. Highest and best use
b. Market value
c. Cost
 d. Selling price

16. The amount paid for goods and services:

a. Cost
b. Sales Price
c. Market Value
d. Investment Value

17. The value to a particular investor, considering the investor’s cash flow
requirements: a. Cost
b. Sales price
c. Market Value
d. Investment value

18. The amount of income left over after all expenses of ownership have
been paid. a. Spending income
b. Investment income
c. Cash Flow
d. Savings

19. Value determined by the taxing authority

a. Cost
b. Fair market value
c. Appraised value
d. Assessed value

20. The added value inherent in the combined common ownership of two or more
contiguous lots:
a. Corner influence
b. Plottage value
c. Cooperative influence
d. Joint venture
21. When the agreed rent is higher than the market rent, it
creates:
a. Overage rent
b. Gross rent
c. Excess rent
d. Escalator
22. Which of the following conditions lowers property values?
a. Conformity within the neighborhood
b. Excessive deferred maintenance
c. High degree of utility
d. Excessive demand
23. Which of the following features represents physical data which must be
considered by the appraiser?
a. Easement
b. Plottage
c. Public restrictions
d. Utility restrictions

24. When a river is changing its course and opens a new bed through a private
estate, this bed shall become public dominion:
a. True
b. False
c. It depends
d. None of the above

25. To be considered comparable to the subject property, a comparable

must be sold: a. In arm’s length transaction
b. With conventional mortgage
c. Without any form of secondary financing
d. For all cash

26. The cost of improvement identical utility to the subject property is called
the subject’s : a. Reproduction cost
b. Replacement cost
c. Sales Price
d. Market Value

27. The principle that prevents an appraiser from appraising a lot for its
commercial potential and the improvements thereon for residual value is :
a. Principle of Increasing and decreasing return
b. Principle of consistent use
c. Principle of highest and best use
d. Principle of anticipation
28. Price and value are:
a. Not necessarily the same
b. Synonymous
c. Different, depending on financing terms
d. Close together in an inactive market
e. Used interchangeably in a report

29. Accrued depreciation is defined in appraisal terms as:

a. Deduction from value
b. Total loss in value from all causes
c. Diminished utility
d. B&C

30. When a building or any of its part, physically intrudes , overlaps or trespass
the property of another, this is called:
a. Assemblage
b. Escheat
c. Easement
d. Encroachment

31. For demand to significantly influence the value of the property, there
must also be: a. Need
b. Supply
c. Good sales technique
d. Purchasing power

32. Suppose a lease contract was signed and agreed on at Ph100 per sqm. However,
similar space in the market is being rented at Ph 150 per sqm. The amount in the
lease contract is known as _______________ rent.
a. Market
b. Economic
c. Overage
d. Contract

33. Anything which affects or limits the fee simple title to property such as
mortgage easements or restrictions of any kind is called:
a. Equity
b. Escheat
 c. Encumbrances
d. Encroachment

34. Economic influences include the following, except:

a. Property value levels
b. Property rent levels
c. Occupant income levels
d. Crime levels

B. Lesson: Government Assessment

Practice quiz:

1. Ordinary Assets are subject to:

a. Normal income tax
b. Capital gains tax
c. Final tax
d. Excise tax

2. Capital Assets are subject to:

a. Normal income tax
b. Capital gains tax
c. Final tax
d. Excise tax

3. The capital gains tax is

a. 10%
b. 12%
c. 30%
d. 6%

4. Ordinary income tax is generally subject to creditable withholding

tax. a. True
b. False
c. None of the above
5. Capital Gains Tax is based on the gross selling price or fair market
value a. At the time of sale, whichever is higher
b. At the time of the signing of the contract, whichever is higher
c. At the time of sale, whichever is lower
d. At the time of the signing of the contract, whichever is higher

6. -Property held by the taxpayer which includes the stocks in trade of the taxpayer
or which would properly be included in the inventory of the taxpayer if on hand at
the close of the taxable year;
-Property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business, which is subject to the allowance for depreciation
-And real property used in trade or business of the taxpayer.

a. Capital assets
b. Ordinary assets
c. Business assets
d. Assets

7. Statement 1- Capital Asset is defined in the negative in the Tax Code of the
Philippines
Statement 2- Capital asset is a property held by the taxpayer but does not
include stock in trade of the taxpayer or which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year;

-Property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business, which is subject to the allowance for depreciation
-And property used in trade or business of the taxpayer.

a. Statement 1 is true
b. Statement 2 is true
c. Both are true
d. Both are false

8. Properties classified as ordinary assets for being in business by a taxpayer engaged

in the business other than real estate business are automatically converted into
capital assets upon showing of proof that the same have not been used in business
for more than _________ prior to the consummation of the taxable transactions
involving said properties.
 a. One ( 1) year
b. Two (2) years
c. Three (3) years
d. Five (5) years

9. A taxpayer is presumed to be habitually engaged in real estate business if the

taxpayer consummated during the preceding year at least _______ taxable real
estate transactions, regardless of amount
a. 3
b. 2
c. 5
d. 6

10. Statement 1 – All real properties acquired by the real estate dealer shall be
considered as ordinary assets.

Statement 2 – All real properties acquired by the real estate developer, whether
developed or underdeveloped as of the time of acquisition,
-and all real properties which are held by the real estate developer primary
for sale or for l ease to customers in the ordinary course of his trade or business,
or -which would properly be included in the inventory of the taxpayer if on hand at
the close of the taxable year, whether in the form of land, building or other
improvements, shall be considered as ordinary assets
a. Statement 1 is true
b. Statement 2 is true
c. Both are true
d. Both are false

11. Statement 1- A property purchased for future use in the business, even though
the purpose is later thwarted by circumstances beyond the taxpayer’s control,
does not lose its character as an ordinary asset.

Statement 2-A mere discontinuance of the active use of the property does not
change it’s character previously established as a business property.
a. Statement 1 is true
b. Statement 2 is true
c. Both are true
 d. Both are false

12. Statement 1- In the case of a taxpayer not engaged in the real estate business,
real properties whether land or building or other improvements, which are being
used or have been previously used in trade or business of the taxpayer shall be
considered ordinary assets.

Statement 2-In the case of a taxpayer who changed its real estate business to a
non-real estate business, real properties by this taxpayer shall remain to be
treated as ordinary assets
a. Statement 1 is true
b. Statement 2 is true
c. Both are true
d. Both are false

13. Statement 1 - In the case of taxpayers who originally registered to be engaged in

the real estate business but failed to subsequently operate, all real properties
acquired by them shall continue to be treated as ordinary assets.

Statement 2 – Real properties classified as capital or ordinary assets in the hands

of the seller/ transferor may change their character in the hands of the buyer/
transferee. a. Statement 1 is true
b. b. Statement 2 is true
c. c. Both are true
d. d. Both are false

14. When the seller is habitually engaged in real estate business, the taxes to be
withheld based on the gross selling price/ total consideration or fair market value
of Php500,000 or less is:
a. 5%
b. 3%
c. 5%
d. 6%

15. When the seller is habitually engaged in real estate business, the taxes to be
withheld based on the gross selling price/ total consideration or fair market value
of more than Php500,000 but less than Ph 2Million is:
 a. 5%
b. 3%
c. 5%
d. 6%

16. When the seller is habitually engaged in real estate business, the taxes to be
withheld based on the gross selling price/ total consideration or fair market value
ofmore than Ph2Million is
a. 1.5%
b. 3%
c. 5%
d. 6%

17. When the seller is not habitually engaged in real estate business, the taxes to be
withheld are:
a. 1.5%
b. 3%
c. 5%
d. 6%

18. Withholding of the taxes shall be imposed on

a. Seller
b. Buyer
c. Withholding agent
d. B or C

19. If the buyer is an individual not engaged in trade or business, the following rules
shall apply:
a. If the sale is a sale of property on the installment plan, specifically if the the
payment within the year do not exceed 25% of the selling price, no withholding tax
is required to be made on the periodic installment payments. Is such cases, the
applicable rate of tax shall be withheld on the LAST installment or installments to
be paid to the seller until the tax is fully paid.

b. On the other hand, if the sale is on a “cash basis” or is “deferred payment sale not
on an installment plan”- meaning that the payment within the year of the sale
exceed
 25% of the selling price, the buyer shall withhold the tax on the FIRST insallment
based on the appropriate price.

c. Both A & B

d. Neither

20. If the buyer is engaged in trade or business, these rules shall apply: a. If the sale
is a sale of property on the installment plan, specifically if the the payment within
the year do not exceed 25% of the selling price, the tax shall be deducted and
withheld by the buyer on every installment.
b. On the other hand, if the sale is on a “cash basis” or is “deferred payment sale not
on an installment plan”- meaning that the payment within the year of the sale
exceed 25% of the selling price, the buyer shall withhold the tax on the FIRST
installment based on the appropriate price.
c. Both A & B
d. Neither

21. A principal residence has the following characteristics, except:

a. The dwelling house, including the land on which it is situated, where the husband
and wife or an unmarried individual, whether or not qualified as head of family, and
members of his family reside.
b. Actual occupancy of such principal residence shall not be considered interrupted or
abandoned by reason of the individual’s temporary absence due to travel, studies,
work abroad or such other similar circumstances.
c. The principal residence must be characterized by permanency, meaning whenever
the individual is absent , there is the intention to return .
d. None of the above

22. The following are the requirements for claiming an exemption from capital gains
tax for a principal residence, except:
a. The proceeds of the sale of the principal residence have been fully utilized in
acquiring or constructing a new principal residence with 18 calendar months from
the date of sale or disposition.
b. The commissioner has been duly notified, through a prescribed return, within 30
days from the date of sale of the person’s intention to avail of the tax exemption.
c. Exemption can only be availed once every 10 years
d. In case of sale of the principal residence, the buyer shall withhold from the seller
and shall deduct from the agreed selling price 6% capital gains tax which shall be
deposited in cash or manager’s check in an interest-bearing account with an
authorized agent bank under an escrow agreement between the seller, buyer,
revenue district officer (RDO) and the authorized agent Bank under escrow
agreement. Given this, the money deposited as well as the interest yield shall only
be released to the seller upon certification by the RDO that the proceeds has
been
utilized in the acquisition of the seller’s new principal residence within 18 calendar
months from date of the sale.
e. None of the above

23. What is the threshold for exemption from VAT on a residential vacant lot by a
taxpayer engaged in real estate:
TRAIN LAW: Ph 3M

24. What is the threshold for exemption from VAT on a residential house and lot by a
taxpayer engaged in real estate:
TRAIN LAW: Ph 2M

25. If a real estate sale is not subject to VAT, it may be subject to

a. Nothing
b. Percentage tax
c. Final withholding tax
d. Creditable withholding tax

26. Documentary stamp tax on the sale of real property is

Answer: 1.5%

27. What is the transfer tax if the property is located in Metro Manila or
cities? -Transfer tax should not exceed 75% of the 1% of the tax
base.

28. What is the transfer tax if the property is located in the province?
-Transfer tax should not be more than 50% of 1% of the total price (sale,
donation, barter, or any other mode of transferring ownership.
29. Upon failure to pay the transfer tax, the penalty is

Answer: 25% of the amount due plus the interest of 2% per month, not exceeding
36 months or 72%.

4.2 REAL ESTATE TAXATION

LOCAL TAXATION
 Valuation of property - based on CLASSIFICATION Assessment level

(in percent) - based on ACTUAL USE

Example:

• For the lot with improvement:

o Classification is residential; actual use is also residential

▪ MV is residential

▪ AL is also residential (20%)

o Classification is residential; actual use is commercial

▪ MV is residential;

▪ AL is commercial (50%)

• For vacant lot:

o Classification is residential; actual use-vacant

▪ MV is residential;

▪ AL is also residential (20%)

o Classification is commercial; actual use-vacant

60

▪ MV is commercial;
 ▪ AL is residential (20%)

Remember this formula:

MV X AL = AV x RATE = REALTY TAX

= AV x 1%-2% = Basic Realty Tax

= AV x 1% = SEF Tax

= AV x 0 – 5% = Idle Land Tax (in some are)

Socialized housing tax per RA 7279 (UDHA)

• (AV less P50,000.00) x .5% = Socialized housing tax

(maybe implemented by LGU)

▪ Fundamental Principles in taxation

o Real property shall be appraised at its current and fair market value;

o It shall be classified for assessment purposes based on its actual use;

o It shall be assessed on the basis of a uniform classification within each local government
unit;

o The appraisal, assessment, levy and collection of real property tax shall not be let to any
private person; and

o The appraisal and assessment of real property shall be equitable.

▪ Land classification

o Residential – principally devoted to habitation

 61

o Commercial – devoted principally for profit

o Industrial – devoted principally for industrial activity as capital investment

o Agricultural – devoted principally to the planting of trees, raising of crops, livestock,

poultry and dairying, salt making, inland fishing and other agricultural activities

o Mineral – land where minerals, metallic or non-metallic exist in sufficient quantity

o Timberland – examples are forest – cannot be alienated

o Special – land with schools, churches, research centers, etc.

▪ Declaration of real property by the owner or administrator

Sworn declaration should be once every 3 years from January 1 – June 30 commencing
with the calendar year 1992 to the assessor’s office.

▪ Duty of person acquiring real property or making improvement thereon

Sworn declaration should be filed with the provincial, city or municipal assessor within
60 days after acquisition or upon completion or occupancy whichever comes first.

▪ Exemption from realty tax

o Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person;

o Charitable institutions, churches, parsonages or convents appurtenant thereto,

mosques, non-profit or religious cemeteries, and all lands, buildings and improvements
actually, directly, and exclusively used for religious, charitable or educational
purposes;
o All machineries and equipment that are actually, directly and exclusively used by local
water districts and government-owned or controlled corporations engaged in

62

the supply and distribution of water and / or generation and transmission of electric
power;

o All real property owned by duly registered cooperatives as provided for R.A. 6938

o Machinery and equipment used for pollution control and environmental protection.

▪ General revision of assessment and property classification

o Within 2 years after the effectivity of this code (January 1, 1992) and every 3 years
thereafter.

▪ Depreciation allowance for machinery

o Not to exceed 5% of its original cost or its reproduction / replacement cost

▪ Rates of tax

o Not to exceed 1% of the assessed value of property for provinces

o Not to exceed 2% for properties situated in case of city or municipality within Metro
Manila

▪ Payment of realty tax

o In case of instalments – can be paid in 4 equal payments

• Deadline: March 31, June 30, Sept.30 and Dec.31 of taxable year

o In case of cash or outright payment

 • Discount of not exceeding 20% may be given if paid on or before Jan31

▪ Payment under protest

o No protest shall be entertained unless taxpayer first pays the tax. There shall be
annotation on the tax receipts the words “paid under protest”. It should be filed

63

within 30 days from the payment and it will be decided within 60 days from receipt.

o If there is an excessive collection due to illegal or erroneous computation, taxpayer may

claim for refund within 2 years from the date the taxpayer is entitled to such reduction.
Refund shall be decided within 60 days.

▪ Interests on unpaid realty tax

o Interest of 2% per month on the basic tax, but in no case shall exceed 36 months.

▪ Distribution of proceeds of realty tax

o In case of provinces – province 35%; municipality 40%; barangay 25%

o In case of cities – city 70%; 30% for the component barangays

• Share of barangays on 30%:

- 50% for the barangay where property is located

- 50% shall accrue equally to all component barangays

o Releases: Quarterly basis payable on or before the 5 of the following month after the
th

end of each quarter payable to the barangay treasurer

▪ Condonation or reduction of real property tax

 o Thru ordinance with the recommendation of Local Disaster Coordinating Council due
to calamity or failure of crops or substantial decrease in the price of agricultural
products; or

o Thru the order of the President of the Philippines when public interest so requires.

REMEDIES FOR THE COLLECTION OF REALTY TAX

64

▪ Local government’s lien

o The basic realty tax and any other tax levied constitute a lien on the property subject to
tax, superior to all liens, charges or encumbrances in favour or any person, irrespective
of the owner or possessor, enforceable by administrative or judicial action and maybe
extinguished upon payment of the tax plus interest and other expenses.

▪ Issuance of warrant of levy by provincial, municipality or city treasurer o

Shall be done within 1 year from the time the tax becomes delinquent

▪ Failure to issue warrant of levy

o Dismissal from service – local treasurer

▪ Advertisement and sale

o Shall be done for 2 weeks in a newspaper of general circulation within 30 days after
warrant has been served.

▪ Redemption of property sold

o Within 1 year from date of registration of sale

o Amount to be paid includes: delinquent tax + interest on delinquent tax + expenses of
sale + interest of not more than 2% per month based on the purchase price from date of
sale to the date of redemption

▪ Possession of property and income

o The owner has the right to occupy the property including collection of fruits from the
time of sale to the date redemption expires.

▪ Final deed of sale

o Shall be executed by local treasurer fee from the lien of such delinquent tax, interest
and expenses of sale.

65

▪ If the owner redeems the property

o The buyer shall be refunded the entire amount paid by him plus interest of no more
than 2% per month.

▪ Cases where there is no bidder or the highest bid price is insufficient to cover the
taxpayer’s obligation

o The local treasurer shall buy the property and ownership shall be vested on the local
government unit concerned.

SPECIAL LEVIES ON REAL PROPERTY

▪ Special Education Fund Tax

o Fixed rate of 1% regardless of location based on the assessed value of property,
proceeds of which shall be allocated to the local school boards. This fund shall be used
for the operation, maintenance, construction and repair of school buildings including
purchase of equipment, books, research and sports development.

▪ Idle Land Tax, Coverage

o Agricultural lands more than 1 hectare ½ of which is still uncultivated;

o Agricultural lands planted to permanent crops with less than 50 trees;

o Lands located in city or municipality other than agricultural land with area of more
than 1,000 square meters 50% of which is still unutilized or unimproved;

o Subdivision lots in residential subdivisions by virtue of local ordinance regardless of

land area

66

ILLUSTRATIVE EXAMPLE (two adjoining lots with different uses)

Lot 1 Lot 2 ▪ Market value per tax declaration P500,000.00 P500,000.00 for the lot

▪ Actual use of improvement residential commercial ▪ Compute realty

tax for the
land at 2% rate

o Market value 500,000.00 500,000.00 o Multiply by: Assessment level 20%

50% o Equals: Assessed Value 100,000.00 250,000.00 o Multiply by: Rate of

Tax 2% 2%
o Equals: Basic Realty Tax for 1year 2,000.00 5,000.00 o Add: SEF Tax at 1% of

assessed value 1,000.00 2,500.00 o Total Tax for 1year (Basic + SEF) P 3,000.00

P 7,500.00

▪ Compute for the realty tax of improvement

if it has -

o The same market value of P1,000,000000 P1,000,000.00 o Multiply by:

Assessment level 30% 50% (see table)

o Equals: Assessed Value 300,000.00 500,000.00 o Multiply by: Rate of Tax 2%

2% o Equals: Basic Realty Tax for 1year 6,000.00 10,000.00 o Add: SEF Tax at

1% of assessed value 3,000.00 5,000.00

67

o Total Tax for 1 year (Basic + SEF) P 9,000.00 P 15,000.00

TOTAL TAX (land and improvement) for 1year P 12,000.00 P 22,500.00

ASSESSMENT LEVELS

Actual Use Assessment level

ON LANDS

▪ Residential 20%

▪ Commercial 50%
 ▪ Industrial 50%

▪ Agricultural 40%

▪ Mineral 50%

▪ Timberland 50%

ON MACHINERIES

▪ Residential 50%

▪ Commercial 80%

▪ Industrial 80%

▪ Agricultural 40%

ON SPECIAL CLASSES

▪ Cultural 15%

68

▪ Scientific 15%

▪ Hospital 15%

▪ Local water district 10%

▪ GOCC

- Water distribution 10%

ON BUILDINGS AND OTHER STRUCTURES

 Fair Market Value Residential Commercial Over To Industrial ▪ P
175,000.00 - or less 0% 30% ▪ 175,000.00 - P 300,000.00 10% 30% ▪ 300,000.00 -
500,000.00 20% 35% ▪ 500,000.00 - 750,000.00 25% 40% ▪ 750,000.00 -
1,000,000.00 30% 50% ▪ 1,000,000.00 - 2,000,000.00 35% 60% ▪ 2,000,000.00 -
5,000,000.00 40% 70% ▪ 5,000,000.00 - 10,000,000.00 50% 75% ▪ 10,000,000.00 -
or more 60% 80%

Other LGU taxes (see table)

• Transfer tax

o Not to exceed 75% of 1% of tax base (also the basis of CGT, CWT & DST) in all cities
in the Philippines, and all municipalities in Metro Manila

69

o Not to exceed 50% of 1% of tax base (also the basis of CGT, CWT & DST) in all
provinces

o Basis is also the basis of CGT, DST & CWT, payable within 60 days from notarization
date

• Business tax

o Applicable to corporations only with properties sold within Quezon City, Pasig City,
Caloocan City, Taguig and Las Piñas.

o Basis is always selling price payable within 60 days from notarization. 70

 REAL ESTATE APPRAISAL

Appraisal is an ESTIMATE or OPINION OF VALUE, usually transmitted in writing, of a certain

and adequately described property, as a specified date, supported by a presentation and
analysis of relevant and factual data.
Purposes of appraisal

1. Loans
2. Insurance
3. Sale
4. Tax assessment
5. Zonal valuation
6. Merger and consolidation
7. Liquidation
8. Joint venture

9.

THREE APPROACHES TO VALUE

1. Market Data or Sales Comparison approach

2. Income Approach
3. Cost Approach

4.

Market Data Approach

Bases on the PRINCIPLE OF SUBSTITUTION, the basis being that no prudent buyer will buy or
rent a given property more than what it will cost him to buy or rent a comparable property

Income Approach

The PRINCIPLE OF ANTICIPATION is the basic premise in this approach because value is based
on the present worth of the future potential benefits of the property.
The mechanics of Income Approach involves the following steps:

1. Analysis of the gross income of the property (past, present, and future) 2.
Forecast of the operating expenses
3. Analysis of the past and current operating expense
4. Computation of the projected net income
5. Select and justify a capitalization rate
6. Provide for the recapture of the capital on the building expense
 Cost Approach

This approach is based on the PRINCIPLE OF REPRODUCTION COST, an assumption that the
reproduction cost is the upper limit value and that a newly constructed building would have
advantage over the existing building, so the appraiser must evaluate any deficiencies or
disadvantages of the existing compared with the new building.
The appraiser obtains a preliminary indication of value by adding to his estimate of the
land value, his estimate of depreciated reproduction cost of the building and other
improvements.

Depreciation

It is a loss in value from any cause. It is classified in accordance with the causes which bring it
about, such as;
1. Deterioration – loss in value brought about by wear and tear
● Curable – must spread for cost of repair
● Incurable – irreparable
2. Functional obsolescence – loss in value due to functional inadequacy or overadequacy, style or
age brought about the changes in art, planning, technology, etc.
3. Economic Obsolescence – loss in value brought about by external economic forces such as
changes in optimum use of land, squatters, etc.
4.

TERMINOLOGIES

1. Revenue – Sales, Lease, Rent, Services

2. Acquisition cost – Purchase Price
3. Incidental cost – other cost (i.e. taxes, legal fees) added to the acquisition cost 4.
Landed cost – acquisition and incidental cost
5. Development cost – cost to develop a rawland
6. Acquisition cost per square meter – total cost over lot or floor area
7. Development cost per square meter – total cost of development over lot or floor area 8.
Construction cost – cost to build improvement
9. Construction cost per square meter – construction cost over floor area
Basic Principles of Property Value

1. Supply and Demand – scarcity of supply influences price and likewise for demand 2. Change
– any change, improvement on the real estate or any development in the vicinity and
community where the property is located influences value.
3. Substitution – The value of replaceable property is influenced by the value of an equally
desirable substitute property
4. Highest and Best Use – refers to the use which in all probability will yield the maximum return at
a given time
5. Principle of Progression – states that the value of a property tends to enhance by its association
with superior properties
6. Principle of Regression – states that the value of property tends to be adversely affected by its
association with inferior properties
7. Increasing and Decreasing Return – any increase in the amount of variable costs will decrease
the margin between the total costs and the revenue that the process will generate. This will
result to diminishing rate of return or net income.
8. Competition – both non-competitive and competitive market influence the value or property
9. Conformity – comprises a reasonable degree of social and economic homogeneity. Misplaced
improvement is a direct violation of conformity.
10. Anticipation – affirms the definition that value is the worth of all present and future benefits
arising from ownership and use of real property.

Forces which Create Value

1. Social
● Population growth or decline
● Change in size of families
● Attitude toward education and social activities
● Attitude toward architectural design and utility

2. Economic
● Commercial and Industrial trends
● Employment and wages
● Availability of money and credit
● Price levels and interest rates

3. Political
● Rent control law
● Urban land reform
● Zoning regulations
● Government development plans
● Other laws of the land restricting usage
● Stability of political environment

4. Physical
● Infrastructures
● Corner influence
 ● Plottage
● Lot size
● Topography

TAXATION

LOCAL TAXATION (REAL PROPERTY TAX)

RA 7160 – Local Government Code (LGC) of 1991 which took effect in January 1,
1992 RA 7160 Art. 197 to 283 – provisions on real estate taxation

The power to impose real property taxes is vested in the Congress. It may be exercised by
local government bodies subject to the guidelines and limitations of the Congress

Ordinance – a law enacted by the legislative body of a local government unit

Tax Ordinance – a law enacted by the legislative body of a local government unit imposing
or granting or withdrawing exemptions from local taxes

Note: real property tax ordinance may be enacted only after preparation, publication
and posting of “Schedule of Fair Market Values” before general revisions

Realty Tax – a direct tax on the ownership of lands and buildings and other
improvements thereon, not specifically exempted and is payable whether the property is
used or not
Improvements – is a value addition made to property or an amelioration in its condition,
amounting to more than repairs or replacement of waste, costing labor or capital and
intended to enhance its value, beauty or utility or to adopt it for new and further purpose.
EXEMPTIONS FROM REALTY TAX (Sec, 234 of the LGC)

1. Real property owned by the republic of the Philippines or any of its political subdivision except
when the beneficial use has been granted, for consideration or otherwise, to a taxable
person
2. Charitable institutions, churches, personages or convents appurtenant thereto, mosques,
nonprofit or religious cemeteries and all lands, buildings and improvements actually, directly
and exclusively used for religious, charitable and educational purposes
3. All machineries and equipment that are actually, directly and exclusively used by local water
districts and government-owned or controlled corporations engaged in the supply and
distribution of water and/or generation and transmission of electric power
4. All real property owned by duly registered cooperatives as provided under R.A. 6938 5.
Machinery and equipment used for pollution control and environmental protection
 The above-stated exemptions are based on the following

1. Ownership Exemption – real property based on ownership such as those owned by the
Republic of the Philippines
2. Character Exemption – exemption based on character such as charitable institutions 3.
Usage Exemption – exemption based on actual, direct and exclusive use such as
educational institutions

Proof of Exemptions (Sec. 206 LGC)

Must be filed with the assessor’s office within thirty (30) days

Fundamental Principles (Real Property Taxation Sec. 198 LGC)

1. Real property shall be appraised at its CURRENT AND FAIR MARKET VALUE 2.
It shall be classified for assessment purpose BASED ON ACTUAL USE
3. It shall be assessed on the basis of UNIFORM CLASSIFICATION within each local
government unit
4. The appraisal, assessment, levy and collection of real property tax SHALL NOT BE let to any
private sector
5. The appraisal and assessment of real property SHALL BE EQUITABLE
Definition of Terms (LGC Sec. 199)

a. Acquisition Cost – for newly acquired machineries, not yet depreciated and appraised within
the year of purchase, refers to actual cost of the machinery to the present owner, plus cost of
transportation, handling and installation at the present site
b. Actual Use – refers to the purpose of which the property is principally or predominantly utilized
by the person in possession thereof
c. Ad Valorem Tax – is a levy on real property determined on the basic of fixed proportion of the
value of the property
d. Agricultural Land – is land devoted principally to the planting of tress, raising of crops,
livestock and poultry, dairying, salt making, inland fishing and similar aquacultural activities
and other agricultural activities, commercial or industrial
e. Appraisal – is the act or process of determining the value of a property as of a specific date
for a specific purpose
f. Assessment – is the act or process of determining the value of the property or proportion
thereof subject to tax, including the discovery, listing, classification and appraisal of
properties
g. Assessed Value – is the fair market value of the real property multiplied by the
assessment level. It is synonymous to taxable value
h. Commercial land – is land devoted principally for the object of profit an is not classified as
agricultura, industrial, mineral, timber or residential land
i. Depreciated Value – is the value remaining after deducting depreciation from
acquisition cost
j. Economic life – is the estimated period over which it is anticipated that a machinery or
equipment may be profitably utilized
k. Fair Market Value – is the price at which property may be sold by a seller who is not
compelled to sell and bought by a buyer who is not compelled to buy
l. Industrial Land – land devoted principally to industrial activity as capital investment and is
not classified as agricultural, commercial timber, mineral or residential land m. Machinery –
embraces machines, equipment, Instruments, appliances which may or may not be attached,
permanently or temporarily to the real property
n. Mineral lands – are lands in which minerals, metallic or non metallic, exist in sufficient
quantity or grade to justify the necessary expenditures to extract and utilized such materials
o. Reassessment – is the assigning of new assessed values to property
p. Remaining Economic Life – is the period of time expressed in years from the date of
appraisal to the date machinery becomes valueless
q. Remaining value – is the value corresponding to the remaining useful life of the
machinery
r. Replacement or Reproduction Cost – is the cost that would be incurred on the basis of
current prices, in acquiring equally desirable substitute property, or the cost of
reproducing a new replica of the property on the basis of current price with the same or
closely similar materials
s. Residual land – is land principally devoted to habitation

Declaration of Real Property

1. Owners shall file a Sworn Declaration of real property once every three (3) years during the
period January first (1 ) to June thirtieth (30 ) commencing with calendar year 1992 (Sec. 202
st th

LGC)
2. Persons acquiring a real property shall file a sworn statement declaring the true value of the
property within sixty (60) days after the acquisition or upon completion or occupancy of the
improvement, whichever, comes earlier (Sec. 204)

Tax Declaration Defined - is a document issued by the municipal, city or provincial assessor to
a tax declarant of a parcel of land and/or improvements thereon.
Note: a tax declaration is not conclusive evidence of ownership

DUTIES OF REGISTERED DEEDS (re: local taxation)

1. Abstract of Registry – is a summary of real property owners which the Register of Deeds shall
prepare and submit to the assessor every year
2. To ensure payment of real estate tax prior to registration for the issuance of title
 DUTY OF OFFICIAL ISSUING BUILDING PERMIT or CERTIFICATE OF REGISTRATION
OF MACHINERY
To transmit a copy of such permit or certificate within (30) days of its issuance to
the assessor’s office

DUTY OF GEODETIC ENGINEERS

To submit the copy of subdivision plan as approved by the Land Management Bureau
or Housing and Land Use Regulatory Board within thirty (30) days to the accessor.
Land Classification (local taxation) Assessment level (Sec.218 LGC)

1. Residential 20%

2. Commercial 50%

3. Industrial 50%

4. Agricultural 40%

5. Mineral 50%

6. Timberland 20%

7. Special (land with schools, churches)

Assessment level for improvements and machineries (with table Sec. 218 LGC)

Note: Assessment level based on ACTUAL USE and multiplied by the Market Value of the land
in order to get the Assessed value. Assessed value id the basis of realty tax

Rate of Realty Tax

● Not to exceed 1% of assessed value of property in municipalities

● Not to exceed 2% for properties situated in cities
● Machineries – graduated

Payment of Realty Tax

● Installment – may be paid in 4 equal installment within March 31, June 30, Sept. 30, December
31
 ● Cash – discount not exceeding 20% if paid before Jan 31 of taxable year

Interest of unpaid realty tax

● 2% per month based on BASIC TAX but in no case SHALL EXCEED 36 MONTHS
Payment under protest (Sec. 226 LGC)

● No protest shall be entertained unless taxpayer first pay the tax. There shall annotation on the
tax
● Receipts the words “paid under protest”. It should be filed within sixty (60) days with the Boards
of Assessment Appeals and decided within 120 days
● If there is an excessive collection due to illegal or erroneous computation, taxpayer may
claim for refund within 2 years, from the date the taxpayer is entitled to such reduction. ●
Refund shall be decided within 60 days

Local Board of Assessment Appeal Composition

Register of Deeds – Chairman

Provincial or city prosecutor – member

Provincial or city engineer – member

Special Levies on Real Property (in addition to realty tax)

● Special Educational Fund

Fixed rate of 1% regardless of location based on the assessed value of the property ●
Idle land tax – 5%
1. Agricultural lands more than 1 hectare ½ of which is still uncultivated 2. Agricultural lands
planted to permanent crops with LESS THAN 50 TRESS 3. Lands located in city or municipality
other than agricultural land with area of
more than 1000 square meters 50% of which is still unutilized or unimproved 4. Subdivision
lots in residential subdivision by virtue of local ordinance regardless of land area
● Socialized housing tax under RA 7279

All local government units are hereby authorized to impose an additional 0.5% tax on the
assessed value of all lands covered by the Socialized housing Program in urban area in excess of
P50,000.00 assessed value
Remedies for collection of delinquent realty tax

1. Foreclosure sale
2. Llen on property
 Redemption period for foreclosure
sale One (1) year

Disposition of Proceeds (sec. 271)

1. In case of province

Province - 35% to general fund

Municipality - 40%

Barangay - 25%

2. In case of cities

City - 70%

Barangay - 30%

3. Municipality within Metro Manila area MMDA

- 35%
Municipality - 35%

Barangay - 30%

REMINDERS:

Codes - MICART
Mineral = 50%
Industrial = 50%
Commercial = 50%
Agricultural = 40%
Residential = 20%
Timberland

Assessment levels for Buildings = CR

Commercial/Industrial building more than Ph10Million =
80% Residential building more than Ph10Million = 60%
 Assessment levels for Machineries =CRAC-G
Commercial = 80%
Residential = 50%
Agricultural = 40%
Cultural = 15%
Government water & electrification = 10%

Transfer Tax
Provincial = 0.5% of 1%
Cities = 0.75% of 1%
Penalty = 25% + 2% /month for 36 months

Creditable witholding tax

Broker’s income less than Ph 750k = 10%
Broker’s income more than Ph 750k = 15%
Habitual seller of socialized housing = 10%
Rental payments to Lessor = 5%

DST
Lease = Ph 3 for the first Ph 2,000
Ph 1 for every succeeding Ph 1,000

Mortgage = Ph 20 for the first Ph 5,000

Ph 10 for every succeeding Ph 5,000
Terms and definitions

1. Ordinary Assets – real estate properties owned by individuals or corporations and used in
business; also include properties of foreign resident corporation and properties of non-
resident corporation
2. Capital Assets – real estate properties owned by individuals or corporations not engaged in real
estate or not used in business
3. Initial payment – total payments made by the buyer of real estate in one calendar year that may
include downpayment and amortizations
4. Installment sale – sale is considered Installment if the initial payment is 25% or less. Taxes can
be paid in installment
5. Deferred Payment sale – if the initial payment during the calendar year in the year of sale is
more than 25% of selling price. Though in substance installment, it is like cash sale where tax is
due and payable and based on total contract price
 6. Tax Basis – adjusted values computed by BIR where tax rates are to be based (capital gain
tax, documentary stamps, transfer fees, registration fees, value added tax) 7. Capital gain tax –
tax imposed on sale of capital asset; gains presume to have been realized by the seller. It is a
final tax
8. Creditable withholding tax – tax imposed on sale of ordinary asset. It is an income tax paid in
advance and credited to taxpayer
9. Documentary stamps – tax on documents
10. Income tax – a tax on earnings or profits arising from property, profession, trade 11.
Percentage tax – business tax on persons or entitles who sell, lease goods or services in the
course of trade or business whose annual gross receipt does not exceed P1,500,000 12. Value
Added Tax – an ad-on sales tax passed on to the buyers
13. Output Vat – amount of Vat included in the invoices or receipts issued by Seller 14.
Input Vat – amount of Vat included in the invoices or receipts of purchaser/buyer

Computation of Tax Basis for Sales Transaction

Sale of land only

Contract price xxx

===
vs

Market Value per tax declaration xxx

===
vs

WHICHEVER IS THE HIGHEST BETWEEN THE THREE IS THE TAX BASIS FOR THE COMPUTATION
OF EITHER CAPITAL GAIN TAX (6%), DOCUMENTARY STAMPS (1.5%), WITHHOLDING TAX (see
table of rates), TRANSFER AND REGISTRATION FEE

Sale of land with Improvement

Contract price xxx

===
vs

Market Value of Land per tax declaration

Zonal Value of land per BIR

(whichever is higher between MV and zonal of land)

Plus: Market value of improvement per Tax Declaration
xxx

xxx

------

BIR Adjusted value xxx

====

WHICHEVER IS HIGHER BETWEEM CONTRACT PRICE AND BIR ADJUSTED VALUE IS THE TAX
BASIS
Note: normally zonal value of land is higher than the market value of land per tax
declaration.

EXEMPTION – PAYMENT OF CAPITAL GAIN TAX

1. If 100% proceed of sale is to be used for purchase or construction of residential unit 2.

Purchase or construction must be within 18 months from date of sale 3. Exemption is only
once every 10 years
CAPITAL GAIN TAX LIABILITY IF 100% PROCEED OF SALE NOT UTILIZED FOR PURCHSE OR
CONSTRUCTION OF NEW RESIDENCE
Contract Price P4,000,000

BIR adjusted FMV 5,000,000

Purchase price – new house 3,000,000

4,000,000 – 3,000,000 = 1,000,000 = 25% unutilized portion

5,000,000 x 6% = CGT 300,000 x 25% = 75,000 CGT payable

DEFERRED CASH PAYMENT

Sale of real property by a real estate dealer on deferred payment basis. Not on
installment plan means sale of real property, the initial payment of which in year of sale exceed
25% of the gross selling price
 In the case of sale of real properties on the deferred payment basis, not on installment
plan, the transaction shall be treated as cash sale and the entire selling price is taxable in the
month of sale. Output tax shall be recognized by the seller and input tax shall accrue to the
buyer at the time of the execution of the instrument (RR no. 4-2007)

VALUE- ADDED TAX

Tax rate 12%

Due date 20 of the month (first two months in a quarter)

th

25 of the month (quarterly)

th

Value added tax due

Output VAT less input VAT = VAT payable

Illustrations:

How much is the selling price before VAT if value added tax is P720,000?

X = selling price
VAT 12% of X = 720,000
12% of X = 720,000
X = 720,000 / .12
X = 6,000,000

Another formula if gross selling price inclusive of VAT is given and amount of VAT
unknown
Selling Price inclusive of VAT 6,720,000
VAT = 6,720,000 x 12 / 112
= 720, 000

DOCUMENTARY STAMPS SALE

Rate – 15.00 for first 5,000; 15.00 for each additional 1,000 and 15.00 for fraction
thereof
Due date – 5 day of the following month
th

VAT EXEMPTION UNDER TRAIN LAW

PREVIOUS TRAIN LAW
SUBJECT TO VAT (NOT EXEMPTED
● Sale of RESIDENTIAL LOT classified as
ANYMORE Effective Jan, 2021 )
ordinary asset valued at P1,919,500 and
below
Previously at Php1,919,500, TRAIN lowered the
VAT exemption of residential lots to
Php1,500,000. However, beginning January 1,
2021, residential lots will no longer be qualified
for VAT exemption.

VAT EXEMPT ( from P12,800 to P15,000)

● Lease of RESIDENTIAL units exceeding
P12,800 per month but the aggregate
● The gross receipts from rentals
amount does not exceed 1,919,500
not exceeding P15,000 per
month per unit shall be exempt
from VAT regardless of the
aggregate annual gross receipts.
It is also exempt from the 3%
percentage tax.

● The gross receipts from rentals

exceeding P15,000 per month
per unit shall be subject to VAT if
the aggregate annual gross
receipts from said units only
exceeds P3,000,000. Otherwise,
the gross receipts will be subject
to the 3% tax imposed under
Section 116 of the National
Internal Revenue Code of 1997,
as amended (Tax Code)
 VAT EXEMPT not more than P2M effective Jan
● Sale of RESIDENTIAL house and lot
classified as ordinary asset valued at
2021
P3,199,200 and below (effective January
1, 2012)

TRAIN also lowered the VAT exemption of

residential dwellings (house and lots,
condominiums) from Php 3,199,200 to Php
2,500,000.

Further, effective January 1, 2021, the

exemption shall be lowered again from
Php2,500,000 to Php2,000,000, and every
three years thereafter, the amount stated
shall be adjusted to its present value using
the Consumer Price Index (CPI) as
published by the Philippine Statistics
Authority (PSA).

VAT EXEMPT ( No change)

● LESale of socialized and economic
housing

FOR PERSONAL INCOME TAX

TRAIN LAW ON ESTATE TAX

Mr. Mayaman, a 70-year-old businessman, single, died of Myocardial
Infarction or heart attack. He left a good amount of estate and his siblings will
be his heirs. How much would be the Estate Tax to be paid by his heirs
comparing the old tax laws and under the new train law?

His gross estate is as follows:

Php13M Family Home

Php3M business properties

Php3M Shares of stocks

Php2M Other Assets

Before dying he incurred Php 1M worth of medical expenses. During burial, the expenses of the
heirs are about Php1 Million.

Mr. Mayaman’s Estate Tax Liability under the old Tax code:

Total Gross Estate: Php13M Family Home + Php3M business properties +

Php3M Shares of stocks + Php2M Other Assets = Php21 Million
Net Estate: Gross Asset minus Allowable deductions

Php21 Million (less) Php 1M Standard Deduction (less) Php 1M from Family Home (less)
500,000 Medical expenses (less) funeral expenses 200,000 (less) Judicial expenses 300,000
Total Taxable Net Estate = Php 18M

Refer to the old tax table above.

If the value of the net estate is Php18 million, the estate shall pay Php1,215,000. An additional
Php1.6 Million shall be imposed, which is the 20% of the excess of P10 million.
The total amount of Estate Tax to be paid would be Php2,815,000.

Mr. Mayaman’s Estate Tax Liability under the TRAIN law:

Total Gross Estate: Php13M Family Home + Php3M business properties + Php3M Shares of
stocks + Php2M Other Assets = Php21 Million
Net Estate: Gross Asset minus Allowable deduction

Php21 Million (less) Php 10M from Family Home (less) Php5 M Standard

Deduction Total Taxable Net Estate = Php6 Million

Under the TRAIN law, from the old estate tax table, it is now computed with 6% flat rate. Thus,
6% of the Php6 million estate is Php360,000.