The TRAIN law did not just affect personal taxes and prices at the grocery store; it also has major implications on local real estate.
While there are many factors that affect the cost of building a house, it is no secret that national policies greatly impact the price of construction, too. Property tax and permit fees, among many others, are primarily implicated in legislature and should not be excluded from the budget of building a home. This means whatever you had set as a budget for building your dream home last year will have to be adjusted.
The newly-implemented Tax Reform for Acceleration and Inclusion (TRAIN) law is one such policy that has a huge impact on construction. Despite decreased income taxes and revised excise taxes, TRAIN received flak for increasing the prices of sugar-based products and other everyday materials such as petroleum, oil, and automobiles.
However, despite mixed implications on different sectors, the Manila Standard reported that the TRAIN law is projected to boost the real estate industry in the country. Moreover, tax collection is seen to be more efficient under the new law.
With this change in legislature comes an entirely new way of looking at building your dream home. According to the Philippine Statistics Authority (PSA), a total of 24.22 million housing units have been established and occupied in the country as of 2015. Whether the TRAIN law will increase or decrease this number remains to be seen.
Know how the tax reform law affects the cost of building a house and equip yourself with the numbers so you know what to do with your next project.
Exemption from Value Added Tax (VAT)
In the long term, changes in VAT collection under TRAIN are perceived to bridge the gap between the rich and the poor in the country. With its aim to level the playing ground and lower the compliance cost between taxpayers and tax administrators, the TRAIN law made multiple amendments in the collection of VAT.
VAT exemption was previously only applicable to lots valued at Php 1,919,500 and below, and the threshold for VAT exemption of house & lots was previously Php 3,199,200. Now, the TRAIN law mandates VAT exemption only for lots worth less than Php 1.5 million and house and lots (and other properties which are deemed residential) worth less than Php 2.5 million.
This means that lots valued from Php 1.5 million to Php 1,919,500 and other residential dwellings valued from Php 2.5 million to Php 3,199,200 are no longer exempted from VAT as they were before the TRAIN law was implemented.
Cost of building materials
Due to the increase in tax of materials such as coal, petroleum, oil, and other products, inflation of the cost of building materials is to be expected as well.
For example, coal, which is used in the production of steel and cement and the generation of electricity, is heavily affected by the TRAIN law. The Bureau of Internal Revenue (BIR) decrees that “Coal produced under coal operating contracts entered into by the government pursuant to Presidential Decree No. 972 as well as those exempted from excise tax on mineral products under other laws shall now be subject to the applicable rates above beginning January 1, 2018.” Excise tax of coal under TRAIN is Php50 in 2018, Php100 in 2019, and Php150 in 2020.
Aside from coal, petroleum is also one of the products which will be getting a boost in excise tax collection under TRAIN. According to the country’s finance department, one of the primary reasons for increasing the excise tax for petroleum is for health and environmental concerns. The TRAIN law mandated a Php6 total tax on diesel, bunker fuel, cooking gas, and kerosene spread up to 2020.
In construction, petroleum is a main ingredient for asphalt and fuel for machines.
Changes in estate tax
Perhaps one of the biggest impacts of the TRAIN law on the real estate industry is brought by its amendments on estate tax. Estate tax is tax levied on the properties or estate of lawful heirs and beneficiaries.
While this provision only affects those who will be acquiring properties from certain donors or relatives, the tax reform law’s amendments on estate tax is an inevitable discussion when it comes to building a new home.
According to the Department of Finance (DOF), estate and donor’s tax alike are made simpler under TRAIN. Estate tax was previously computed under a schedule where properties worth Php200,00 above could be subject to tax ranging from five percent to 20 percent. The new law puts into effect a six-percent flat rate estate tax for lawful heirs and beneficiaries.
Even more significant, family homes worth Php 10 million and below are exempt from estate tax. However, a house must be certified as the family home by the barangay or the locality.
Estate tax deductions are allowed deductions to the gross estate of a person. Judicial expenses, medical expenses, and funeral costs are removed from the allowable deductions under the TRAIN law. However, the standard is raised to Php5 million from the previous Php1 million.
On the other hand, the tax reform law also extended the timeframe of filing estate tax returns. Relative to the decedent’s death, filing is extended to one year from what used to be six months. Certification from a certified public accountant (CPA) is also required for estate tax returns, which reach a gross value of Php5 million and beyond.
Furthermore, the TRAIN law requires that full estate tax liability, when paid in installments, must be settled in two years.
Overall, the newly implemented tax reform law affects the cost of building a house mainly through its amendments on estate tax and the domino effect of increased excise tax on natural resources such as coal and petroleum.
While tax no longer applies to properties of certain values, the TRAIN law’s effects differ depending on the kind of lifestyle a homeowner lives and the type of residence they intend to build.
Aside from TRAIN, many other factors also affect the cost of building a house. Size, type, location, and the preferred timetable also play big roles when it comes to the budget allotted for your new home.
Main photo via Depositphotos