Buying Real Properties

Someone asked me, "I have a friend who...

is now 78 years old. He is buying an office building in downtown Binondo worth more than a 100million. Should he put it in his name or in the name of the corporation?

My answer is unless the man intends to live until 178 years old, the safer thing now is to put the property in the name of a corporation or of his children if he has any.

Estate tax is 20% for amounts higher than 10million. If he puts it in his name, then the tax on the property when he transfers to his heirs later on will easily be 18million or more. Even if he sells it to his son right before he dies or if he is resurrected later on to sign a sale, it will still be subject to 6% capital gains tax plus 1.5% doc stamps, both computed on the gross sales amount. That's already 7.5million pesos.

If it is put in a corporation, then the death of the old man will not materially affect the corporation. The estate tax will be based on the book value of the shares he holds, not on zonal value or the prevailing price of the property.

However, it must be emphasized that if put in the name of a holding company, the taxation will be income taxation of 30% of the gains (difference between selling price less the cost of purchase) and not 6% final tax.

Furthermore, the property will likely be subject to 12% VAT if it is used by the corporation for its business operations. However, if the old man will put it in his name then lease it out to his business or to other corporations, then he is engaged in real estate business and he will also be subject to 12% VAT.

So what will be computed at the end is if estate tax of 20% will be bigger or smaller than the 30% tax on gains.

As to putting in the name of his children, the old man has to ask if the children has enough income to justify the purchase. Secondly, is the old man comfortable enough with the children that they won't sell the property before he even dies.