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It is not uncommon for some first-time homeowners to encounter for the very first time the term “real property tax.” Some people, even the older generations, are discombobulated by the concept of paying taxes annually in order to keep enjoying the benefits of owning real property. Some of us had this misconception that after paying transfer taxes at the BIR and the provincial or city treasurer, there are no longer any taxes to be paid for buying a parcel of land or a house.

What is real property tax?

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Real property tax is an annual ad valorem tax on real property such as land, building, machinery, and other improvements. It is imposed by a provincial or city government or a municipal government.

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The administration, appraisal, assessment, levy and collection of real property tax is governed by the Local Government Code of the Philippines or Republic Act No. 7160. 

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How is real property tax computed?

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First, real property is appraised. 

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"Appraisal" is the act or process of determining the value of property as of a specific date for a specific purpose. 

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Real property shall be appraised at its current and fair market value prevailing in the locality where the property is situated. In simple terms, the value of your property is determined for taxation purposes.

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Note that the local assessor undertakes a general revision of real property assessments every three (3) years. This means that the value of your property and the tax you pay is subject to change.

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Second, the applicable assessment value is determined. 

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"Assessment" is the act or process of determining the value of a property, or proportion thereof subject to tax, including the discovery, listing, classification, and appraisal of properties. 

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Real property shall be classified, valued and assessed on the basis of its actual use regardless of where it is located, whoever owns it, and whoever uses it. 

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For purposes of assessment, real property shall be classified as residential, agricultural, commercial, industrial, mineral, or special.

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"Assessment Level" is the percentage applied to the fair market value to determine the taxable value of the property. The assessment levels to be applied depends on where you live. It is fixed by ordinances of the concerned Sanggunian subject to the threshold set by the Local Government Code which depends on the class of real property.

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Third, the real property tax is computed by multiplying the assessed value with the uniform tax rate.

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In the case of a province, it may fix a uniform rate of basic real property tax rate not exceeding one percent (1%) of the assessed value of real property; and in the case of a city or a municipality within the Metropolitan Manila Area, at the rate not exceeding two percent (2%) of the assessed value of real property.  

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Example:

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You own an ancestral house in a residential area in Lahug, Cebu City. It used to be your family home. However, you renovated the same and it is now being used as a restaurant. The house is classified as a commercial property despite being in a residential area. Taking that into consideration, it was appraised at a fair market value of PhP1,000,000.00.

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The Sangguniang Panlungsod set the assessment level for commercial buildings at 40%. This means that the assessed value is 40% of PhP1,000,000.00 or PhP400,000.00. 

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The Sangguniang Panlungsod has also set the real property tax rate at the maximum of 1%. This means that you will have to pay 1% of the assessed value or PhP4,000.00.

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Disclaimer: This article is for informational purposes only and should not be considered legal advice. For specific guidance on concerns regarding real property taxation, consult with a legal professional.

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Padin & Partners Law Offices is a full-service law firm that provides assistance in taxation. For real property tax concerns: book an appointment or reach us at  +63 (32) 316-1540 or +63 917 188 0361.

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