When it comes to transferring ownership of land, a house and lot, or a condo unit to loved ones or relatives, you generally have two main options: selling the property or donating it. Each method has its own set of implications and benefits. This guide will walk you through both options, helping you determine which is more cost-effective and suitable for your situation.
To Sell or To Donate?
A few months ago, my cousin faced a decision and sought my advice. She had bought a house and lot through the Pag-Ibig Housing Loan Program. Although her sister applied for the loan, my cousin made all the payments, and the title was issued in her sister’s name upon full payment. Now, my cousin wants to transfer the property to her own name. She wondered whether she should sell it to herself or donate it. Which method would be more advantageous in her case?
Understanding the Options
Contract of Sale
Article 1458 of the Civil Code of the Philippines defines a contract of sale as follows:
"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."
To have a valid contract of sale, the following three essential elements must be present:
Consent: Both the seller and buyer must agree on the terms of the sale, including the property and the price.
Object: The specific property being sold must be clearly identified.
Cause: The agreed price in money or its equivalent must be specified.
If any of these elements are missing, the contract may be considered void. Additionally, both parties must have the legal capacity to enter into the contract.
Deed of Donation
Article 725 of the Civil Code defines a donation as '"an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it."
A donation involves transferring ownership of property without monetary compensation. The key aspects of a donation include:
Liberality and Gratuitousness: The transfer is made out of the donor's generosity and does not involve any payment.
Acceptance: The recipient must accept the donation in writing.
For a donation to be valid, it must be documented in a public deed and notarized. The Deed of Donation must clearly specify the property being donated and any charges or conditions the recipient must fulfill.
Article 749 adds that for the donation of immovable property to be valid, it must be made in a public document that details the property and the value of any charges the donee must satisfy.
Can the deed of donation be revoked?
Yes, a deed of donation can be canceled or revoked under specific conditions as per Philippine law. Here’s a summary of the grounds for revocation:
Non-fulfillment of Condition (Article 764): If the donation was made with a condition and the donee fails to meet it, the donor can revoke the donation, and the property will revert to the donor.
Ingratitude (Article 765): A donor may revoke the donation if the donee:
a. Commits an offense against the donor’s person, honor, or property.
b. Accuses the donor of a crime (except a crime against honor).
c. Refuses to provide legally or morally required support to the donor.
Subsequent Birth of Children (Article 760): If the donor has a child after the donation and was unaware of the child’s birth at the time of donation, the donation may be reduced.
Incapacity of the Donor (Article 739): A donation made by someone who lacked capacity at the time can be considered null and void.
Legal Grounds in the Deed: If the deed specifies conditions for revocation, the donation can be canceled if those conditions are met.
Mutual Agreement: Both the donor and donee can agree to revoke the donation, ideally in writing to avoid disputes.
Note: Consult a lawyer if you’re considering or facing the revocation of a donation to understand the legal process and protect your interests.
Tax Implications
Before the TRAIN Law:
Sale of Property: The Capital Gains Tax rate was 6%, calculated based on the higher of the Fair Market Value (FMV) or Gross Selling Price (GSP).
Donation of Property: The Donor's Tax rate ranged from 2% to 15% for relatives and 30% for strangers, depending on the property's value.
Before the TRAIN Law, choosing between selling and donating often involved detailed tax calculations to determine which option would result in lower taxes.
After the TRAIN Law (RA 10963):
The Donor's Tax rate is now a flat 6% for properties valued at PHP 250,000 or more. Donations valued below this threshold are exempt from tax. This uniform tax rate simplifies the decision-making process, as there is no longer a need to compare taxes between selling and donating.
Important Considerations
Taxation Rates
The TRAIN Law has streamlined tax calculations by introducing a flat 6% rate for both sales and donations. This change promotes transparency and reduces the complexity of tax calculations, making it easier for individuals to make informed decisions.
Simulated Sales
In the past, some individuals engaged in simulated sales to avoid higher taxes. This practice involved creating a fake sale where the buyer either had no intention to pay or where the money came from the seller. Such practices are void under the Civil Code. The TRAIN Law’s uniform tax rate has lessened the appeal of these practices by removing the tax advantage previously sought through simulated sales.
Legal Framework:
Articles 1345 and 1346 of the Civil Code address simulated sales:
Article 1345: Simulation of a contract can be absolute or relative. Absolute simulation occurs when the parties do not intend to be bound by the contract, while relative simulation involves concealing the true agreement.
Article 1346: An absolutely simulated contract is void. In relative simulation, if it does not harm third parties or contravene laws, morals, or public policy, it binds the parties to their real agreement.
The TRAIN Law’s fixed tax rate has reduced the incentive for such practices, ensuring that transactions are more straightforward and fair.
Estate Tax Planning
Previously, transferring property before death was a common strategy to minimize estate taxes. Estate taxes used to be calculated on graduated rates from 5% to 20%. Under the TRAIN Law, the Estate Tax is now a flat 6% of the net estate value. Additionally, there are increased standard deductions: PHP 5 million for medical and funeral expenses and PHP 10 million for the family home.
Final Thought:
Navigating the transfer of property involves understanding the implications of both selling and donating. With the recent changes introduced by the TRAIN Law, the decision-making process has become more straightforward. The uniform tax rates simplify comparisons and help in making an informed choice. For a deeper dive into estate tax planning and related issues, stay tuned for future articles.
This blog is for educational purposes only. Always consult a lawyer to understand your specific situation and choose the best legal course of action. If you're looking for a residential lot, house and lot, or condo unit in Cebu, contact us at 0920-207-5035 or email cebuhousefinder@yahoo.com for free assistance.
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