If you are planning to transfer ownership of land, house-and-lot or condo unit to your loved ones or relatives, this blog is for you. You have two options: to sale or to donate. Which is the better way to transfer property between relatives? Months ago, my cousin asked me which is the better option: Deed of Sale or Deed of Donation. She bought a house-and-lot through the Pag-Ibig Housing Loan Program. She asked her sister to apply for the said loan but she's the one who was paying for everything. After full payment, the title was released under her sister's name as the owner of the said property. Now, she wanted to transfer the property to her name. Which is better, to sale or to donate?
In this blog, let us discuss about the transfer of property through the Deed of Sale and the Deed of Donation. Which is better?
I. DEFINITION OF TERMS
CONTRACT OF SALE
Article 1458 of Republic Act 386, otherwise known as the “Civil Code of the Philippines,” defines a contract of sale as follows:
Article 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent.
It is added: “A contract of sale may be absolute or conditional.” (read here for full discussion)
Based on the above definition of sale, there are 3 essential elements:
Consent - when there is a meeting of minds between the seller and the buyer to transfer the property in exchange of the price.
Object - the determinate thing to be delivered.
Cause - the price certain in money or its equivalent.
The 3 essential elements must be present and none is absent. Otherwise, the Contract of Sale is void. The contracting parties must have legal capacity to enter into a contract.
DEED OF DONATION
Article 725 of the “Civil Code of the Philippines" defines a donation as follows:
Article 725. Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it
An act of donation is a legal option for a person to voluntarily transfer his/her ownership over a property to his intended recipient who in turn accepts the donated property. They key words here are "liberality", "gratuitousness" and "acceptance". Unlike in the sale, there is no monetary requirement as the only basis for the gift is donor's love to the donee or the recipient of the donated property. The donee must accept in writing (either in the same document or another document) the said donation during the lifetime of the donor. In writing because the Deed of Donation must be a public instrument (and therefore, the need for notarization) in order to be valid.
Article 749. In order that the donation of an immovable may be valid, it must be made in a public document, specifying therein the property donated and the value of the charges which the donee must satisfy.
II. TAXATION ON SALE AND DONATION OF PROPERTY
The primary reason why people are asking about which is better, the Deed of Sale or Deed of Donation, is the tax payment to government in the transfer of property.
Prior to the TRAIN Law, the computation of Capital Gains Tax and Donor's Tax are quite different.
For the sale of the property, the tax rate is 6% Capital Gains Tax based on Fair Market Value (FMV) or Gross Selling Price (GSP) of the property whichever is higher. For the donation of the property, the tax rate is based on the graduated Donor's Tax Rate ranging from 2% to 15% for relatives and 30% for strangers based on the value of the property.
In other words, the bigger amount of the value of the property, the bigger tax you shall pay to the government. This is, prior to the TRAIN Law, people compute and compare the tax for sale and for donation. Whichever is lower between the Capital Gains Tax and Donor's Tax, the parties agree to execute the necessary document either the Deed of Sale or the Deed of Donation.
Now, under the TRAIN Law (RA 10963), the Donor's Tax Rate is reduced to 6% of the value of the property donated (P250,000 and up). Gifts not more than P250,000 are exempted. Under TRAIN Law, uniform donor's tax rate for relatives and strangers.
What does it mean? It means that the question which is better based on the tax payments is no longer applicable. You don't compute whichever is lower in order to decide which course of action to be pursued: to sale or to donate.
III. ISSUES AND CONCERNS
TAXATION RATES ON TRANSFER OF PROPERTIES
In view of the TRAIN law, people do not need to select between sale or donation based on the concern of "how much do I need to pay?". The taxation rate on the transfer of property is now fixed at 6%. This will encourage people to be honest: either they sell the property or they donate the property. So, in the execution of Deed of Sale or Deed of Donation is now based on the intention of the contracting parties and no longer how much taxes to be paid in the transfer of properties.
SIMULATED SALE IS VOID
Prior to TRAIN Law, parents transfer property ownership to their child through a simulated sale to save on taxes. Again because the taxation rates between the Capital Gains Tax and the Donor's Tax were different then. For parties to save on taxes, they will execute the Deed of Sale instead of the Deed of Donation which is the original intention of the transfer of property. Another case of a simulated sale is when the parents execute the Deed of Sale even if the child has no financial capacity to buy the property or the money comes from the parents themselves. In this case, the Contract to Sale can be voided. Any third party can question the sale, either other sibling or the state (BIR) itself. Under Article 1345 and 1346 of the New Civil Code of the Philippines, a simulated sale is voided:
Article 1345. Simulation of a contract may be absolute or relative. The former takes place when the parties do not intend to be bound at all; the latter, when the parties conceal their true agreement.
Article 1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy binds the parties to their real agreement.
While the 3 essential elements of the contract of sale are present, the cause or consideration can be subjected to verification of the capacity to pay of the buyer. If the buyer has no capacity to pay to buy the property, the contract of sale is void.
The Supreme Court explained the simulated sale in the case of Rebusquillo and Orosco vs. Spouses Gualvez, et al. [G.R. No. 204029, June 4, 2014] as follows:
In absolute simulation, there is a colorable contract but it has no substance as the parties have no intention to be bound by it. The main characteristic of an absolute simulation is that the apparent contract is not really desired or intended to produce legal effect or in any way alter the juridical situation of the parties. As a result, an absolutely simulated or fictitious contract is void and the parties may recover from each other what they may have given under the contract.
However, if the parties state a false cause in the contract to conceal their real agreement, the contract is relatively simulated and the parties are still bound by their real agreement. Hence, where the essential requisites of a contract are present and the simulation refers only to the content or terms of the contract, the agreement is absolutely binding and enforceable between the parties and their successors in interest.
This practice is no longer applicable under the TRAIN Law where the tax rate is fixed at 6% in both sale or donation.
ESTATE TAX PLANNING
The idea of transferring property ownership (either sale or donation) from parents to children while the parents are still alive is done as tax planning or saving on the estate taxes. Like the Donor's Tax, the Estate Tax is computed, prior to TRAIN Law, based on the graduated estate tax rates ranging from 5% to 20% as shown in the table below.
So, the contracting parties (parents and child) will compute which of the options (estate tax, sale or donation) is the lowest.
Now, under the TRAIN Law, the Estate Tax Rate is also reduced to 6% of the Value of Net Estate. It means that because the computation of the estate tax of 6% is based on the value of net estate, the tax would be smaller compared to sale or to donation.
The Standard Deductions of medical and funeral expenses, for instance, is now raised up to P5 million pesos (from up to P1 million) and the deduction for Family Home is now raised up to P10 million (from up to 1 million).
There are other issues and concerns that we can discuss on this issue, but the article is already long. I will discuss some issues in a separate article. One thing that I wish to include here the limits of donation compare to sale.
Our discussion here is for educational purposes only. Always consult your lawyer for your specific case to assess your actual case and what proper legal course of action to take.
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