Hurdling donor’s tax obligations (I)-A A +A
Real Estate Updates
Sunday, September 15, 2013
WE HAVE been asked on several occasions, what is the more advantageous mode of transferring real properties, by sale or through donation?
Before we can give our thinking on the matter, the more appropriate thing to do is to be more familiar with donation as a way of transferring properties.
"Donation" is an act of liberality whereby a person (called the donor) disposes gratuitously of a thing or right in favor of another (called the receiver), who accepts it. Likewise when a person gives to another a thing or right on account of the latter's merits or services rendered by him to the donor, provided they do not constitute a demandable debt, or when the gift imposes upon the receiver a burden which is less than the value of the thing given, there is also a "donation."
Donation maybe of two classes: Donation Inter Vivos and Donation Mortis Causa. The former refers to one made between living persons and is perfected or consummated from the time the donor knows of the acceptance by the receiver while the latter is one which is to take effect upon the death of the donor and thus, partakes of the nature of a testamentary disposition which is subject to the payment of an estate tax.
The other rules on "Donation" (under the Civil Code) include the following:
1. In order that the donation of an immovable may be valid, it must be in a public document, specifying therein the property donated and the value of the charges which the receiver must satisfy.
2. The acceptance may be made in the same deed of donation or in a separate public document, but it shall not take effect unless it is done during the lifetime of the donor. If the acceptance is made in a separate document, the donor shall be notified thereof in an authentic form, and this step shall be noted in both instruments.
3. The donation may comprehend all the present property of the donor, or part thereof, provided he reserves, in full ownership or usufruct, sufficient means for the support of himself, and of all relatives who, at the time of the acceptance of the donations, are by law entitled to be supported by the donor. Without such reservation, the donation shall be reduced on petition of any person affected.
4. When a donation is made to several persons jointly, it is understood to be in equal shares, and there shall be no right of accretion among them, unless the donor has otherwise provided.
5. The abovementioned donation (#4) shall not be applicable to donations made to the husband and wife jointly, between them there shall be a right of accretion, if the contrary has not been provided by the donor.
6. The right to dispose of some of the things donated, or of some amount which shall be a charge thereon, may be reserved by the donor; but if he should die without having made use of this right, the property or amount reserved shall belong to the receiver.
7. The ownership of property may also be donated to one person and the usufruct to another or others, provided all the receivers are living at the time of the donation.
Nature of Gift (Donor's) Tax and the Rule on the Imposition of the Donor's Tax
The donor's tax is not a property tax, but is a tax imposed on the transfer of property by way of gift inter vivos. "Gift Tax" is the tax imposed on the transfer without consideration of property between two or more persons who are living at the time the transfer is made; or tax imposed on the transfer of property by gift inter vivos without relation to the death of the donor. It is an excise tax on the donor's privilege to give or on the receiver's privilege to receive. This is not a tax on property as we have previously mentioned because its imposition does not depend on general ownership of such property.
There shall be imposed and paid upon the transfer by any person, resident or non-resident, of property by gift, a tax based on the graduated rates 0% - 15% based on the computed "Net Gifts." The Gift shall apply whether the transfer is in trust or otherwise, direct or indirect and whether the property is real or personal, tangible or intangible. The donor's tax shall not apply unless and until there is a completed gift.
A gift that is incomplete because of reserved powers becomes complete when either:
1. The donor renounces the power; or
2. His/her right to exercise the reserved power ceases because of the happening of some event or contingency or the fulfillment of some condition, other than because of the donor's death.
Renunciation by the surviving spouse of his/her share in the conjugal partnership or absolute community after the dissolution of the marriage in favor of the heirs of the deceased spouse or any other person/s is subject to donor's tax. However, general renunciation by an heir, including the surviving spouse, of his/her share in the hereditary estate left by the decedent is not subject to donor's tax, unless specifically and categorically done in favor of identified heir/s to the exclusion or disadvantage of the other heirs in the hereditary estate.
(To be continued next week)
Published in the Sun.Star Baguio newspaper on September 15, 2013.