Knowing the tax for rental income in the Philippines is the first thing you should know about when considering investing in real estate in the country. While the Philippines is well-known as a popular travel destination, it is also a great place to start a rental business. Thanks to the country’s inexpensive cost of living and hospitality, there has been an increase in expats wanting to live or even retire in the country.
Who needs to pay real estate rental income tax in the Philippines?
Any individual or entity earning property rental income in the Philippines is subject to tax obligations and BIR requirements for house rental in the Philippines. It includes residents and non-residents who derive rental income from properties in the Philippines. In most cases, the property owner or landlord is responsible for paying taxes on the rental income.
Tax for rental income in the Philippines
There are several property taxes in the Philippines, such as property purchase tax and tax for rental income in the Philippines, including:
- Personal Income Tax: Paid if the property is owned and rented out by an individual.
- Local Business Tax: Paid to the local government by businesses earning rental income.
Get help with property taxes in the Philippines
Personal Income Tax
The tax for rental income in the Philippines is progressive, meaning the more you earn, the higher the tax rate you will pay. The rate depends on the total income you have made the whole year. The rate is as follows:
| Taxable income | Tax rate |
|---|---|
| Less than ₱ 250,000 ($4,500) | 0% |
| Between ₱ 250,000 ($4,500) and ₱ 400,000 ($7,200) | 15% |
| Between ₱ 400,000 ($7,200) and ₱ 800,000 ($14,400) | 20% |
| Between ₱ 800,000 ($14,400) and ₱ 2 million ($36,000) | 25% |
| Between ₱ 2 million ($36,000) and ₱ 8 million ($144,000) | 30% |
| More than ₱ 8 million ($144,000) | 35% |
Foreigners’ income tax for rental income in the Philippines
Foreigners, however, pay another tax rate than the standard income tax rates of the Philippines.
- Foreign residents: 25% of the gross rental income.
- Foreign non-residents: 35% of the gross rental income.
When do you pay income tax?
Foreigners engaged in trade or business, such as property rental business, must file an annual Income Tax Return (ITR). It summarizes their total income, deductions, and credits for the year. The usual deadline for filing the annual Income Tax Return is April 15 of the following year.
Further, there is also a requirement for filing quarterly income tax returns due on the following dates:
- 1st quarter: On or before May 15
- 2nd quarter: On or before August 15
- 3rd quarter: On or before November 15
However, don’t worry if you think you will pay two kinds of income tax since these quarterly payments will advance the annual income tax liability. Precise payment of the taxes on rental income in the Philippines is crucial. It will ensure compliance with the law and prevent potential penalties or legal issues related to non-payment or underreporting of income.
How to calculate tax for rental income in the Philippines?
If you’re in the Philippines, it’s crucial to understand the specific steps involved in calculating the tax for rental income. Below is a detailed guide to help you through this process:
- Calculate the gross rental income: The first step involves computing your gross rental income. This sum is the rent you’ve collected from your real estate properties throughout the year.
- Identify allowable deductions: You need to subtract your allowable deductions. In the context of tax for rental income, these deductions are specific expenses you’ve incurred that are deducted from your gross rental income. Common allowable deductions for real estate rental income tax are costs related to repairs and maintenance, property taxes, and mortgage loan interests.
- Apply the relevant tax rate: It’s essential to apply the appropriate tax rate. For rental income in the Philippines, the standard tax rate is 25% for resident citizens and resident aliens. However, non-resident aliens are subject to a 35% real estate rental income tax rate.
- Calculate your tax for rental income: The final step is the actual calculation of your rental income tax in the Philippines.
To illustrate, here’s a simplified example of calculating real estate rental income tax in the Philippines:
- Gross rent income: ₱ 230,000 ($4,140)
- Allowable deductions: ₱ 30,000 ($540)
- Taxable income: ₱ 200,000 ($3,600)
- Tax rate: 25%
- Rental income tax: ₱ 50,000 ($900)
This example shows the importance of each step in ensuring that your tax for rental income is calculated accurately. By adhering to these guidelines, property owners can navigate the challenges of real estate rental income tax in the Philippines, fostering compliance and financial transparency.
Local Business Tax
All entities doing business must have a business permit. The law requires that such business permits be displayed so customers can see them when transacting. To acquire this business permit, payment of local business tax is necessary.
The specific rate depends on the local tax regulations or ordinances established by the local government unit where you can find the business. Most local tax ordinances specify an annual amount based on gross sales or receipts, while other rates are a percentage of gross sales or receipts. These rates can vary depending on the type of business activity, meaning that a single entity engaged in multiple business lines may be subject to different rates.
When is local business tax due?
You can settle it annually before January 20 or quarterly within the first 20 days of January and the first month of each subsequent quarter.
Get help with proper tax planning
When investing in real estate or land in the Philippines, it’s recommended to engage the services of a tax expert or attorney to help you with the tax for rental income in the Philippines. Own Property Abroad can provide essential guidance throughout the transaction, ensuring complete legal and tax responsibilities adherence.
With our expert team, you won’t have to navigate the complexities of the real estate rental income tax alone. For further information on how we can assist you, kindly drop your details below or email us at hello@ownpropertyabroad.com.
Get help with property taxes in the Philippines
Conclusion
While the Philippines is scenic and peaceful, the laws on taxes on rental income in the Philippines can be too complicated for foreigners. Given the complexity and the need for precise and punctual filings, we strongly advise availing professional services. Enjoy the country’s beautiful landscapes and beaches without worrying about your tax obligations. Moreover, having a rental business in the country is a lucrative investment, and you can remain confident in it by seeking expert advice.
Frequently Asked Questions (FAQs)
Is rent tax deductible in the Philippines?
Rent expenses are generally not deductible for individuals who rent residential properties for personal use. However, businesses can deduct rent expenses as a business expense when leasing commercial properties for business purposes.
What is the TRAIN Law in the Philippines?
The TRAIN law is a significant law that amended specific tax regulations in the Philippines. Notably, it provided that individuals earning an annual income below ₱ 250,000 ($4,500) are exempted from income tax. The VAT threshold increased to ₱ 3 million ($54,000), which meant that smaller businesses with annual sales below such amount were exempt from VAT.
What is rental income tax in the Philippines TRAIN Law?
Rental income forms part of your income tax, subject to the progressive rates. The tax rates and thresholds for rental income are determined by the individual’s total annual revenue, as outlined in the tax brackets specified in the law.
