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Via Lamudi: Impact of TRAIN 2 in Real Estate Industry this 2019

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Lamudi quoted Pronove Tai International Property Consultants's insight on Tax Reform for Acceleration and Inclusion (TRAIN) 1.0.

A study conducted by international property consultants Pronove Tai on the impact of the TRAIN law on socialized and low-cost housing noted that families who would avail of such housing packages could expect savings of as much as Php 360,000 due to the VAT exemption.

Decongesting Metro Manila

“Outside the National Capital Region, the sale of residential dwellings worth Php 2 million and below will also be exempted from the 12 percent value-added tax. This provision supports the move to decongest Metro Manila,” according to the Pronove Tai report.

Given the estimated 5.7 million units of mass housing backlog in the Philippines, this provision under the TRAIN law would help the government of President Duterte address a major national problem like this by encouraging property development firms to venture into socialized and low-cost housing and provide this segment of property seekers with affordable and decent housing.

Under the TRAIN law, the following socialized housing segments are exempted from being imposed a value-added tax:

  • Sale of real properties not primarily held for sale to customers or for lease in the ordinary course of trade or business.
  • Sale of real property utilized for socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws.
  • Residential lot valued at Php 1.5 million and below.
  • House and lot and other residential dwellings valued at Php 2.5 million and below, provided that beginning January 1, 2021, the VAT exemption shall only apply to the sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business.
  • Sale of house and lot and other residential dwellings with a selling price of not more than Php 2 million, provided, that every three years thereafter, the amount shall be adjusted to its present value using the Consumer Price Index as published by the Philippine Statistics Authority.

Tax relief on monthly rentals for a young workforce

Another group of beneficiaries under the TRAIN law would be those who are paying a monthly rent or lease of Php 15,000 and below for apartments or houses. According to the Philippine Statistics Authority, as much as 47 percent of the country’s labor force is comprised of young professionals aged 21-35. These young members of the workforce, noted the Pronove Tai report, are likely to rent condominiums or apartments near their workplaces. As such, they would benefit the most in the VAT exemption for the lease of residential units being raised from Php 12,800 to Php 15,000 as well as the removal of VAT on association dues for condominiums.

This should be music to the ears of real estate developers whose project portfolio include developing residential condominiums whose main demographic target belong to this segment—young urban professionals who prefer to reside in places that are near their workplace and are easily accessible to reach whether by taking public transportation, walking, or biking.

The growing problem of urban congestion, particularly in several cities in Metro Manila, have seen the rise across the archipelago of mixed-use development projects were commercial, business, and residential buildings are clustered together in a particular location. Although some of the residential units in these mixed-use hubs do not qualify for VAT exemptions when it comes to monthly rentals, especially those that are located in the more affluent part of the city, some developers might want to consider zeroing in on those young urban professionals that make up a majority of the workforce who are looking for residential abodes that offer accessibility, comfort, and convenience on their daily work commute.

It’s not surprising then that an array of township projects and mixed-use communities are expected to arise over the next few years not just in Metro Manila and other cosmopolitan urban hubs such as Cebu and Davao but in other key provincial cities as well such as Iloilo and Clark. Policy-makers and urban planners see these as a pivotal solution in addressing the growing problem of urban congestion.

Encouraging growth in real estate sector

“TRAIN simplified the tax policy by removing the 2 to 15 percent tax table as previously used. Twenty years is a long time. The tax code was definitely in need of a simplification to encourage compliance and increase generation. We remain hopeful that implementation will be done smoothly and efficiently,” Pronove Tai noted in its report, adding that some of the provisions on land and property under the first tax reform package would encourage growth across the real estate sector.

Since corporate and commercial property taxes were not included in the first tax reform package, many are hoping that several amendments on the provisions on this segment of the real estate industry would be incorporated in the third tax reform package and would come out as a win-win situation for property developers, tenants, and the government.

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