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Foreigner's guide to buying real estate in the philippines



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Foreigner's guide to buying real estate in the philippines

  1. 1. Buying Real Estate In The Philippines Presented by: Robert L. Wolff, Esq. P.O. Box 381 Dumaguete City, Negros Oriental Philippines 6200 NY (518) 325-6015 PH 09266485273
  2. 2. Disclaimer I am not an attorney admitted to practice law in the Philippines. I am an attorney admitted to practice law in New York. Forunately I have a friend who is a Philippine lawyer that can give advice. The following is not legal advice, but rather comments and observations. For answers to legal issues raised by this presentation, you need to consult an attorney admitted to practice law in the Philippines.
  3. 3. Where Are Retirees Retiring The Philippines is one of the top retirement destinations in the world for retirees. Many of the retirees that move to the Philippines would prefer to own their homes, rather than rent. For a non-citizen, the Philippines restrict their ability to own real state. Unfortunately, these restrictions can create problems for a non-citizen attempting to acquire real property in the Philippines. Before they buy property, non-citizens should take the time to understand the real property rules of the Philippines.
  4. 4. Right to Own Philippine Property The right to own real property in the Philippines is not the same as in the United States (U.S.). As a general rule, in the U.S., anyone can purchase real property – citizen and non- citizen. This is not the case in the Philippines. There are limitations placed on a non-citizen’s ability to buy real estate. The following is a summary of the more important rules applicable to the purchase of real estate in the Philippines.
  5. 5. What is the Constitutional provision on foreign ownership of land in the Philippines Section 7, Article XII of the 1987 Constitution states - Save in case of hereditary succession, no private lands shall be transferred or conveyed except to individuals, corporations or associations qualified to acquire or hold lands of the public domain. General Rule- only a Filipino citizen, or a Corporation or Partnership at least 60% of the capita of which is owned by Filipinos, or a Trust with a Philippine Trustee are entitled to acquire land in the Philippines.
  6. 6. What is the purpose for this Constitutional prohibition?  The primary purpose of the Constitutional provision is to preserve real property in the Philippines for Filipino Citizens.  Note - the Supreme Court in the case of “United Church Board for World Ministries v. Sebastian” reiterated the consistent ruling that if land is invalidly transferred to an alien who subsequently becomes a Filipino citizen or transfers it to a person or entity qualified under the Philippine constitution to own real property, the flaw in the original transaction is considered cured and the title of the transferee is rendered valid.  This is a very important legal point.
  7. 7. What are the exceptions to the restriction on foreigners’ acquisition of land in the Philippines? 1. Purchase by a former natural-born Filipino citizen subject to the limitations prescribed by Batas Pambansa 185 and R.A 8179 2. Acquisition before the 1935 Constitution 3. Purchase of not more than 40% interest in a condominium project 4. Acquisition through hereditary succession if the foreigner is a legal or natural heir 5. Special Visas(SRRV) for foreigners allowing 100% condo and townhouse ownership
  8. 8. Torrens System The Torrens system of land registration is used in the Philippines. The Torrens system was adapted to assure a buyer that if he buys a land covered by an Original Certificate of Title (OCT) or the Transfer Certificate of Title (TCT) issued by the Registry of Deeds, the same will be absolute, indefeasible and imprescriptibly. Note - the registration of the land under Torrens system in the name of one person does not bar evidence to show that the land is owned by another person. For example, the land is held in trust for another.
  9. 9. Land ownership by former Filipino citizens? At one time, Filipinos who were naturalized as U.S. citizens were deemed to have lost their Filipino citizenship. Now, former Filipinos who became naturalized citizens of foreign countries are deemed not to have lost their Philippine citizenship. Thus they can enjoy all the rights and privileges of a Filipino regarding land ownership in the Philippines.
  10. 10. Dual Citizenship Laws on Property Ownership  Dual citizenship is available for individuals having two citizenship and passports from two different countries.  Under the Philippine real estate law, dual citizens are former Philippine citizens born in the Philippines that have immigrated to another country, such as the U.S., and obtained citizenship of that country.  Having a dual citizenship allows the dual Philippine citizenship holder full rights of possession of Philippine real estate property.
  11. 11. Non-Dual Citizens  If a former Filipino who is now a naturalized citizen of a foreign country does not want however to avail of the Dual Citizen Law in the Philippines, he or she can still acquire land based on BP (Batas Pambansa) 185 and RA (Republic Act) 8179 but subject to the following limitations: 1. For residential use (BP 185 enacted in March 1982): Up to 1,000 square meters of residential land, and pp to one (1) hectare of agricultural of farm land. 2. For business / commercial use (RA 8179 which amended the Foreign Investment Act of 1991): Up to 5,00 square meters of urban land, and p to three (3) hectares of rural land
  12. 12. What are the property rights of a foreigner married to a Filipino citizen? 1. A foreigner can legally own a house or building in the Philippines as long as he or she does not own the land on which the structure is built. 2. Title to the house or building can be a document like Deed of Sale, can contain the name of the foreigner-spouse, except for the title to the underlining land.
  13. 13. What is meant by ownership on the basis of hereditary succession? When foreigner is married to a Filipino citizen, and the Filipino spouse dies, the non-Filipino as the natural heir will become the legal owner of the property subject to the Compulsory Heir Rule. Under the compulsary heir rule, other heirs may share in the ownership of the property. Children, as legal heirs, may also own real property. Even if he or she does not hold Filipino citizenship.  Hereditary Succession refers to intestate succession where the person dies without leaving a Last Will and Testament.  The Hereditary Succession rules do not apply to the transfer of land by a Last Will and Testament.
  14. 14. For Leasing of Philippine Real Estate Property  A foreign person, corporation and or trust may enter into a lease agreement with Filipino landowners for an initial period of up to 25 years, and renewable for another 25 years.  Main drawback to a lease you do not acquire ownership of the property.
  15. 15. Using a Philippine Corporation To Buy Real Estate To take ownership to a private land, residential house and lot, commercial building and lot, foreign persons or corporations can form a Philippine corporation or a trust.  The corporation is to be 40% foreign-owned (maximum) and 60% Filipino-owned (minimum), and not less than 5 incorporators and 5 directors who are Filipino.  There must be a stated amount of paid in capital, in the bank account of the corporation when applying for approval of the incorporation of the corporation.  A foreign national may be sole person on the bank account, allowing him or her control ( in my opinion limited control) over the funds derived from the corporation and the income or sale of the assets or property.  There are other requirements not discussed herein.
  16. 16. Using a Trust Most attorneys in the Philippines do not use a Trust to allow a foreign-citizen to acquire real property in the Philippines, but if the trustee of a trust is a Filipino or Filipino entity, the law allows the trust to hold real estate. The law only requires that the controlling trustee be a Philippine citizen, which can be an individual or an entity. Often the trust is done in conjunction with tax, estate and asset protection planning. Don’t forget, there are forms you may need to file the IRS if you are a U.S. citizen creating a trust in the Philippines.
  17. 17. Trusts A trust is a fiduciary relationship in which a trustee holds legal title to specific property under a fiduciary duty to manage, invest and safeguard the trust assets for the benefit of designated beneficiaries, who hold equitable title. Three parties to a trust:  Grantor, creates the trust;  Trustee, legal owner of the trust property;  Beneficiary, the person for whose benefit the trust property is held.
  18. 18. The Three Reasons to Create a Trusts avoidance of probate, asset management and, asset protection.
  19. 19. Trusts 1. Trusts are classified according to the method of their creation.  Express Trust arises from the expressed intention of the owner of the property to create the relationship with respect to the property – a written agreement.  Resulting Trust arises from the presumed intention of the owner of the property.  Constructive Trust does not depend on intention but rather constitute a useful equitable remedy in cases involving fraud and unjust enrichment.
  20. 20. Constructive Trust  It is a name given to a flexible equitable remedy designed to prevent unjust enrichment in cases involving fraud or wrongful conduct, where a gift is alleged to have been made to a party who stood in a confidential or fiduciary relationship with the donor  The donee has the burden of proof to show by clear and convincing evidence that the gift was voluntary and not influenced by fraud, duress or coercion.  This is a very important legal principle when putting title to property in the name of someone else.
  21. 21. Deed The Deed of Absolute Sale is the document showing legal transfer of real estate proper ownership. The Deed of Absolute Sale is then taken to the Registry of Deeds to be officially recorded after paying the documentary stamp, transfer tax and registration fees. The Registry of Deeds will then issue a Certificate of Title. Always verify from the Registry of Deeds the authenticity of a Transfer Certificate of Title before buying a property. If the seller only has tax declaration, be extra cautious and check with neighbors, the Barangay captain or anyone in the know in the community to verify the seller/owner/s true identity and property history.
  22. 22. 22 Deed of Assignment/Deed in Trust  A Deed of Assignment / Deed in Trust is an agreement between the trustor and the trustee where the trustor assigns to the trustee legal title to property that the trust holds for the benefit of the beneficiary of the trust.  Typically, this arrangement is used by a lender or purchaser of real property to protect their interest in real property being purchased pending the actual transfer to the buyer.
  23. 23. Documents Needed To File Deed Documents needed when transferring the title to the new owner: Certified true copy of the certificate of title Notarized copies of the Deed of Sale Latest tax declaration for the property Certificate from the Bureau of Internal Revenue that the capital gains tax and documentary stamps have been paid Receipt of the payment of the transfer tax and registration fees Birth certificate of Buyer
  24. 24. Closing Cost for Purchase of Real Estate This is the standard sharing of expenses between the buyer and the seller when transferring the real estate property title (TCT-Transfer Certificate of Title or CCT- Condominium Certificate of Title) to a new owner. As a general rule, the SELLER pays for the: Capital Gains Tax equivalent to 6% of the selling price of the Deed of Sale or the zonal value, whichever is higher. (Withholding Tax if seller is a corporation.) Unpaid real state taxes due (if any). Electric, water, interest, etc. bills. Agent’s/Broker commission. The BUYER pays for the cost of registration: The Documentary Stamp Tax-1.5% of the selling price or zonal value or fair market value, which ever is higher. Transfer Tax-0.5% of the selling price, or zonal value or fair market value, which ever is higher. Incidental and miscellaneous expenses incurred during the registration process.
  25. 25. Standard Practice The above sharing of expenses is the standard practice in the Philippines. However, buyers and sellers can mutually agree on other terms as long as it is done during the negotiation period (before the signing of the Deed of Sale). It is often advisable for the buyer to have some of the purchase price held in escrow to cover the seller’s expenses not paid at closing. For example, to pay the capital gains tax if being paid by the seller.
  26. 26. Registration Process If you are not doing it yourself, besure to get someone who knows what they are doing help you with the registration process (sometimes for a fee).
  27. 27. Sale of Philippine Real Property The sale of Philippine real property will trigger a capital gains tax.  Both the U.S. and the Philippines tax their citizen and residents on their world wide income. A duel US/Philippine citizen could be taxed on the gain from the sale of their property in both the US and the Philippines.  Fortunately, there is a US/Philippine income tax treaty that limits the gains only to Philippine taxes.  For individual taxpayers, general rule, the tax rate is 6% for sale of real estate classed as a capital asset. A different rule may apply if the sale is to the government.
  28. 28. Calculation of Tax Tax is based on the gross selling price or zonal value (current fair market value) whichever is higher. The capital gain from the sale of a principal residence can be deferred if the sale proceeds are fully used for the acquisition or construction of a new principal residence within 18 months of the date of sale.  This exemption can be used only once every ten years.  This exemption does not apply to the purchase of a principal residence prior to sale.  The adjusted basis or cost of the property is its cost plus, expenses of acquisition
  29. 29. General Rules Controlling the Ownership of Real Property When Things Go Bad with;  The Wife  The Girlfriend  A Third Party Holding the Title of the Real Property
  30. 30. Absolute Community of Property in Philippine Family Law The system Absolute Community of property is a system of property relation that treats properties acquired by the spouses during their marriage as jointly-owned. It consists of all the properties owned by the spouses at the time of the celebration of the marriage( before marriage) or acquired thereafter unless the property involved is expressly excluded by an existing marriage settlement or by the provisions of the Philippine Family Law. The following shall be excluded from the community property:
  31. 31. Absolute Community continuation 1. Property acquired during the marriage by gratuitous title by either spouse, and the fruits as well as income thereof, if any, unless it is expressly provided by the donor, testator or grantor that they shall form part of the community property; 2. Property for personal and exclusive use of either spouse. However, jewelry shall form part of the community property; 3. Property acquired before the marriage by either spouse who has legitimate descendants by a former marriage, and the fruits as well as the income, if any, of such property.
  32. 32. Property Regime of Unions Without Marriage  When a man and a woman who are capacitated to marry each other, live exclusively with each other as husband and wife without the benefit or marriage or under a void marriage, their wages and salaries shall be owned by them in equal shares and property acquired by both of them through their work or industry shall be governed by the rules on co-ownership.  In the absence of proof to the contrary, properties acquired while they lived together shall be presumed to have been obtained by their joint efforts, works or industry shall be owned by them in equal shares.  A party who did not participate in the acquisition by the other party of any property shall be deemed to have contributed jointly in the acquisition thereof if the former’s effort consisted in the care and maintenance of the family and of the household.
  33. 33. Property regime continuation…  Neither party can encumber or dispose by acts inter vivos of his or her share in the property acquired during cohabitation and owned in common, without the consent of other, until after the termination of their cohabitation.  When only one of the parties to a void marriage is in good faith, the share of the party in the bad faith in the co-ownership shall be forfeited in favor of their common children. In case of default of or waiver by any or all of the common children or their descendants, each vacant share shall belong to the respective surviving descendants. In the absence of descendants, such share shall belong to the innocent party. In all cases, the forfeiture shall take place upon termination of the cohabitation.
  34. 34. Property regime continuation…  In cases of cohabitation not falling under the preceding, i.e. no capacity to marry, only the properties acquired by both of the parties through their actual joint contribution of money, property, or industry shall be owned by them in common in proportion to their respective contributions.  In the absence of proof to the contrary, their contributions and corresponding shares are presumed to be equal.  The same rule and presumption shall apply to joint deposits of money and evidence of credit.
  35. 35. Two Important Cases There are two important cases that foreigners buying real property in the Philippines in the name of their spouse, girlfriend or third party should be aware of - the Muller and Borromeo cases: Muller is unfavorable to the foreigner Borromeo is favorable to the foreigner
  36. 36. The Muller Case Summary of Important Facts Helmut (a non-Philippine citizen) and Elena Muller(a Philippine citizen) were married in Germany in 1989. Later they moved to the Philippines in 1992. Helmut inherited a house in Germany. He sold the house and used the proceeds to buy a land in Antipolo, Rizal in Elena’s name. The marriage failed. Helmut moved in the Regional Trial court (RTC) to have the proceeds for the sale of his parent’s house removed from the sale proceeds of the Rizal property and returned to him. The RTC acknowledge the proceeds from the sale was his separate property, but because it was used to buy property in Elena’s name, refused to allow the return of the proceeds to him. Helmut appealed RTC decision to the Court of Appeals (CA). The CA held in Helmut’s favor. Elena appealed the CA decision to the Supreme Court (SC). The SC held in Elena’s favor.
  37. 37. Muller Case continuation  Interesting Points  CA- noted that Helmut was asking merely for reimbursement of his separate property used to acquire the Rizal property, not a transfer of ownership of the real property to him. The CA also noted that Elena’s ownership of Helmut’s interest in the property was held in trust for her husband Helmut.  And, with regard to the house(not the land), there is nothing in the Philippine Constitution which prohibits Helmut from acquiring it.  The SC disagreed. It held no trust relationship was created between Helmut and Elena, no ownership held in trust was allowed and Helmut’s attempt to recover the proceeds from the sale of his parent’s property used to buy the Rizal property violated the Philippine Constitution.  The SC holding in Muller seems to be incorrect.
  38. 38. The Borromeo Case “What are the rights of a foreigner (and his successor-in- interest) who acquired real properties in the Philippines as against his former Filipina girlfriend in whose sole name the properties were registered under the Torrens system?” This is the question answered by the Supreme Court in its decision in Borromeo vs. Descallar, G.R. No. 159310, February 24, 2009
  39. 39. The Borromeo Case Summary of the Important Facts Wihelm Jambrich, an Austrian and non-citizen, in 1984 met Antoinetta Opalla-Descaller(Philippine Citizen), a separated mother of two boys. Jambrich tries to buy a house in his name – deed was rejected. He then buys the house in Descallar’s name. Relationship fails. What is different in this case is that Jambrich owes money to Camilo F. Borromeo. To pay his debt Jambrich transfers his interest in the property to Borromeo by a Deed of Absolute Sale/Assignment. Borromeo filed his deed and then discovered title was in the name of Descallar, plus it had been mortgaged. As expected, Descallar was not willing to give up the property to Borromeo.
  40. 40. Borromeo Case continuation… Borromeo brought an action in the RTC to recover the property from Descaller. The RTC held Borromeo was the owner of the property. Declared title in Descallar was null and void. Ordered the Register of Deeds to cancel Descallar title and issue a new one in Borromeo’s name. Descallar appealed to the CA, which held in favor of Descallar. Borromeo appealed to the SC, which held in favor of Borromeo. The SC held Jambrich was the source of funds to purchase the property. Therefore he had a right to his interest in the property. A certificate of title does not make one the true owner of property. It is only a means of confirming the facts of its existence with notice to the world at large.
  41. 41. Borromeo Case continuation…  Borromeo, being a Philippine citizen satisfied the requirements of the Constitution for owning real state in the Philippines.  He is deemed the owner of the property,  It is important to note The SC looked at who provided the consideration for the purchase of the property. The relationship of the parties and if they were -married, or not married. If not married, did they have the capacity to marry or did they lack the capacity to marry. The evidence presented showed that Jambrich had all the authority to transfer all his rights, interest and participation in the subject properties by the virtue of the Deed of Assignment to the buyer, Borromeo, as it was shown that the funds to purchase the properties came from Jambrich, who was therefore the true buyer of the property.
  42. 42. Foreigner Married To Or Living With A Philippine Citizen  When a foreigner buys real property in the Philippines, caution should be taken when considering taking title to Philippine real estate in the name of the Philippine spouse or girlfriend. In the event of marital problems with the Philippine spouse or girlfriend ,the foreign national may have limited rights to the assets or none at all. The law is not always fair.  This is why foreigners often use leases, corporations, trusts and other legal documents to protect their financial interest in real estate purchased in the Philippines.
  43. 43. Trusts and Asset Protection There are many good reasons to create a trust to hold assets in the Philippines, such as; If the Trust is funded prior to marriage to a Filipino or Filipina, assets are not subject to the Philippine Absolute Community Property Rules that treat one half of the assets owned prior to marriage, as owned by the new spouse when they say I DO. A Trust avoids having to put title to real property in the name of a third party or corporation. A Trust provides Asset Protection and avoids probate.
  44. 44. Questions  What if in the Muller case, Helmut had transferred his interest to a Filipino, a qualified Trust or Corporation, would the result be the same? Note - the Supreme Court in the case of “United Church Board for World Ministries v. Sebastian” held that when land is invalidly transferred to an alien is then transferred it to a Filipino, the flaw in the original transaction is considered cured and the title of the transferee is rendered valid.  Did the CA get the Muller facts right and SC get it wrong?  What about the constructive trust argument?  Note: The SC is not a trier of facts. The findings of fact in the trial Court are accorded great and respect, if not finality to subject into a number of exceptions.
  45. 45. Options to Acquire Real Property  Lease the property. Problem with a lease is that there is no benefit from future appreciation of the property. If you own the property, you benefit from the future appreciation.  Create a corporation. Need to meet the limitations of non- citizen ownership of corporations in Philippines, such as the 40/60 equity ownership rule, five Filipino directors, etc.  Create a trust to purchase the property. Need a Philippine Trustee-individual or corporation. An advantage of a trust is that it can also be used for asset protection planning and as a means of avoiding probate.
  46. 46. Something to Think About – An Investment Trust  An Investment Trust is designed to pool the money of several individuals for the purpose of making an investment.  For example, five individuals pool their money to buy a piece of real property, the trust then improves and sub- divides the property, which is then sold as individual lots.  The trust provides a way to spread the riches among several investors and a way to share profits.
  47. 47. IRS Circular 230 Pursuant to Internal Revenue Service Circular 230, we hereby inform you that the advice set forth herein with respect to U.S. federal tax issues, or other legal issues were not intended or written by Robert L. Wolff to be used as legal advice, and cannot be used by you or anybody else for the purpose of (i) avoiding any penalties that may be imposed on you or any other person under the Internal Revenue Code (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein or (iii) as legal advice. You are advise to seek advice based on your particular circumstances from an independent tax advisor or attorney.