“…but in this world nothing can be said to be certain, except death and taxes.”
– Benjamin Franklin, in a letter to Jean-Baptiste Leroy, 1789
With property values rising in the last 6 months, more and more sellers are motivated to sell real properties to get the maximum amount of money for their benefit. The rise in property values is not limited only to the National Capital Region, but to all urban and suburban areas in various provinces in Luzon, Visayas and Mindanao.
It is a fact that there are numerous real properties for sale that are still registered in the names of the deceased parent, grandparent or next of kin. As licensed real estate service practitioners (RESPs), we know that when the registered owner of a real property is dead the same cannot be transferred to the name of the buyer until the estate of the deceased person has been settled.
To elucidate, settling the estate of the deceased means the declaration of all the properties of the deceased – real and personal – and payment of the correct estate taxes on all the declared properties with the Bureau of Internal Revenue (BIR). No property in the name of the deceased can be transferred to the name of another person without the settlement of the estate – whether testate or intestate.
RESPs should dissuade their seller-clients from resurrecting the dead to make it appear that the deceased executed the deed of sale of the property just to pay capital gains and evade the payment of estate taxes.
The savings made on paying capital gains tax only is not worth the trouble of a BIR investigation. It is not good for your seller-client as well as to the RESPs who advised such a mode of transfer.
Do what is right. Prepare the documents for the extrajudicial settlement of the estate when there has been or prior to a meeting of the minds between the buyer and seller.
Here are 6 simple steps to follow when settling the estate of a deceased person in preparation to sell the property to an interested buyer:
STEP 1: Fill out BIR Form 1904 (Application for Registration). All parties that transact with the BIR should have a valid Tax Identification Number (TIN). Normally, Form 1904 is used to verify the TIN of the seller as well as the buyer. But in payment of estate taxes, the estate of the deceased will have to have a separate TIN from the seller-heirs.
In filling out Form 1904, here is what to do: (a) on the Taxpayer Type, mark with an “X” the box indicating “One-Time Taxpayer”; (b) on Classification, mark with an “X” the box indicating “Non-individual”; and (c) on Sex, mark with an “X” the appropriate box indicating gender of the deceased.
Next, write “ESTATE OF [THE DECEASED PERSON’S NAME]” in the space provided for the Taxpayer’s Name. On the Civil Status, mark with an “X” the appropriate box indicating civil status of the deceased. On the Date of Birth, write the date of death of the decedent as it appears in the Certificate of Death.
Write the Local Address of the decedent in the space provided for. Take note that the Local Address of the decedent should be the one indicated in the death certificate.
If the person dies abroad and has no residence in the Philippines fill out the Foreign Address by writing the address indicated in the death certificate. In such a case, the filing of the Estate Tax Return should be made at the BIR Revenue District Office (RDO) No. 39 (South Quezon City).
Finally, put an “X” on the box indicating Transfer of Properties by Succession (Death); and on Tax Types mark an “X” the box indicating Estate Tax. Remember to indicate the name of the Taxpayer/Authorized Agent and sign the same. It is important to attach a photocopy of the certified copy of the Certificate of Death to Form 1904.
STEP 2: Prepare the mandatory documentary requirements to be submitted to the BIR for the settlement of estate of a deceased individual. You can get a copy of the Checklist of Documentary Requirements by clicking on the link. Go to page 3 and 4 of the document to find the list.
STEP 3: Prepare BIR Form 1801 (Estate Tax Return). Fill up the name and the TIN of the Estate on the spaces provided in Form 1801. The ONETT Officer of the Day will assist you in filling out the rest of the form based on the computation he/she has made based on the review of the documents presented. However, if the estate of the deceased is more than P3 million then it would be wise to consult a certified public account to determine the initial computation of the taxable estate.
STEP 4: Pay the estate tax as computed. You can pay the estate tax with an Authorized Agent Bank (AAB) of the RDO having jurisdiction over the place of residence of the decedent at the time of his/her death.
Cash is best to settle the estate tax. But if the tax due is a large amount and security would be a problem for the one paying it then the same can be paid by means of a Manager’s or Cashier’s Check.
If payment is made through a Manager’s or Cashier’s Check, the following should be written as payee: “[BANK, BRANCH] FAO BUREAU OF INTERNAL REVENUE IFO [TAXPAYER’S NAME] [TIN OF TAXPAYER].” However, if you will pay the estate tax using a AAB that is a government financial institution like Landbank of the Philippines, then the payee may simply be “BUREAU OF INTERNAL REVENUE.”
STEP 5: Submit all documentary requirements and proof of payment to the RDO having jurisdiction over the place of residence of the decedent. Upon submission of the requirements and proof of payment, the ONETT – One-Time Transaction – will issue a Claim Stub with a reference number. When you follow up if a Certificate Authorizing Registration (CAR) has already been issued then you only need to give the reference number.
Please note that the processing of estate taxes requires a minimum of 60 days by the BIR. Depending on the review of the documents, the BIR has the right to require the heirs for additional requirements especially in connection to any deductions claimed by the estate.
There is a P1 million standard deduction for all estates. If one of the properties being settled is the family home then a barangay certificate should be presented to certify that the decedent is a bona fide resident of the barangay where the family home is located, if the deduction of P1 million for the family home will be claimed. The family home should be in the name of the decedent in order for the deduction to be claimed.
STEP 6. Wait for the release of the Certificate Authorizing Registration. Upon the release of the CAR, the property can now be sold to a buyer. The CAR, along with the transferring document – Extra-judicial Settlement of Estate, Affidavit of Self-Adjudication, etc. – and the Tax Clearance Certificate should be part of the documents to be presented when paying the capital gains and documentary stamp taxes covering the sale of the property.
Some buyers, however, would want to have the title and tax declarations of the real property in the name of the heir or heirs before they finalize the purchase of the property. In such a case, the RESP should process the payment of transfer tax to the LGU concerned and the registration fees with the Registry of Deeds having jurisdiction over the location of the real property.
The same process mentioned above will govern if the transferring document is an Extra-judicial Settlement of Estate with Sale.
A final note should be made to alert RESPs and the concerned readers. If the Extra-judicial Settlement of Estate contains a waiver of some sort for and in favor of a particular heir or heirs, the BIR shall assess the Heirs additional taxes in the form of a donor’s tax.
The BIR considers such waiver as a donation on the part of the waiving heir/s to the recipient heir/s. This has been ruling of the BIR when Commissioner Henares took the helm of the bureau in 2010.
If you want to know how RA 10963 (otherwise known as the Tax Reform for Acceleration and Inclusion) affected the provision of estate taxes in our Tax Code, you can read our latest article entitled “7 Important Changes TRAIN Did for Estate Taxation.”