This guide is for individuals who lease out a house, condo, apartment, room or commercial unit. A ₱25,000-a-month commercial unit, for example, owes ₱4,000 a year under the 8% option, or ₱9,000 in percentage tax under graduated rates with the 40% optional standard deduction, as worked out below. It is not for corporations that lease property, which pay corporate income tax, or for hotels, inns and pension houses, which RR 13-2018 excludes from the residential lease rules.
Rent is business income. You register with the BIR on BIR Form 1901, the application for self-employed individuals (it has a facility code for "Real Property for Lease"), even for one unit. Then two taxes apply: income tax on your earnings, and a business tax on gross rent.
How much tax you pay on rent: quick table
Each figure is a year's tax for an individual whose only income is the rent and who is not VAT-registered. "Graduated" uses the 40% optional standard deduction plus 3% percentage tax where it applies.
| Monthly rent | Graduated + OSD | 8% option | 5% withheld by a business tenant |
|---|---|---|---|
| ₱15,000 residential | ₱0 (exempt from percentage tax) | ₱0 | ₱9,000 |
| ₱20,000 residential | ₱7,200 (percentage tax only) | ₱0 | ₱12,000 |
| ₱25,000 commercial | ₱9,000 (percentage tax only) | ₱4,000 | ₱15,000 |
| ₱50,000 commercial | ₱34,500 (₱16,500 income tax + ₱18,000 percentage tax) | ₱28,000 | ₱30,000 |
| ₱100,000 commercial | ₱122,500 (₱86,500 + ₱36,000) | ₱76,000 | ₱60,000 |
At these amounts the 8% option is never worse. Graduated rates win only when your actual deductible expenses run well above 40% of the rent. A ₱20,000 residential unit shows the trap: it is ₱5,000 over the exemption line, so it owes percentage tax, while 8% on ₱240,000 a year is zero. Withholding is a credit, so whatever the tenant withheld above your tax is refundable or carried as a credit on your annual return. Run your own mix in the income tax calculator.
Income tax: graduated rates or the 8% option
Under graduated rates, taxable income is taxed on the schedule in NIRC Sec. 24(A)(2)(a), as amended by TRAIN (RA 10963), "effective January 1, 2023 and onwards":
| Annual taxable income | Tax |
|---|---|
| Not over ₱250,000 | 0% |
| Over ₱250,000 to ₱400,000 | 15% of the excess over ₱250,000 |
| Over ₱400,000 to ₱800,000 | ₱22,500 + 20% of the excess over ₱400,000 |
| Over ₱800,000 to ₱2,000,000 | ₱102,500 + 25% of the excess over ₱800,000 |
| Over ₱2,000,000 to ₱8,000,000 | ₱402,500 + 30% of the excess over ₱2,000,000 |
| Over ₱8,000,000 | ₱2,202,500 + 35% of the excess over ₱8,000,000 |
To reach taxable income you deduct either actual expenses or the optional standard deduction (OSD) of up to 40% of gross receipts (NIRC Sec. 34(L)). The OSD needs no proof of expenses. Actual expenses can include real property tax, repairs, insurance, depreciation of the building and interest on a loan used for the property.
The 8% option under NIRC Sec. 24(A)(2)(b) is a tax of 8% "on gross sales or gross receipts and other non-operating income in excess of Two hundred fifty thousand pesos (₱250,000) in lieu of the graduated income tax rates ... and the percentage tax under Section 116". No expenses are deducted. Per the BIR digest of RR 8-2018, it is "not available to a VAT-registered taxpayer", applies only while gross receipts stay within the ₱3,000,000 VAT threshold, and must be elected on the first quarter return; the election "shall be irrevocable" for that year.
Is rent subject to VAT? Percentage tax, VAT or neither
For most leases the line is ₱3,000,000. NIRC Sec. 109(CC), as amended by the Ease of Paying Taxes Act (RA 11976), exempts from VAT the "sale or lease of goods or properties" where gross annual sales do not exceed ₱3,000,000. A non-VAT lessor under that line pays 3% of gross quarterly sales under Sec. 116 (the rate since July 1, 2023, after a temporary 1% from July 2020 to June 2023), filed on BIR Form 2551Q. Above ₱3,000,000 you register for VAT and charge 12% on rent (Sec. 108(A)), filed quarterly on BIR Form 2550Q. If you elect the 8% option, it replaces the 3% percentage tax, so no 2551Q tax is due.
Residential units at ₱15,000 a month or less are exempt from both. TRAIN, in force since January 1, 2018, set NIRC Sec. 109(Q) as the "Lease of a residential unit with a monthly rental not exceeding Fifteen thousand pesos (₱15,000)". The Ease of Paying Taxes Act did not change that paragraph, so ₱15,000 is still the figure. RR 13-2018 spells out the rules:
- Rent of ₱15,000 or less per unit per month is "exempt from VAT regardless of the aggregate annual gross receipts. It is also exempt from the 3% percentage tax."
- Rent above ₱15,000 per unit is subject to VAT "if the aggregate annual gross receipts from said units only exceeds P3,000,000.00. Otherwise, the gross receipts will be subject to the 3% tax".
- "Residential units" means apartments, houses and lots used as homes, and dwellings such as dormitories, rooms and bed spaces, but not motels, hotels, lodging houses, inns or pension houses. A "unit" is counted per person for dormitories and bed spaces and per room for rooms.
RR 13-2018's own illustration: a lessor with 20 residential units at ₱14,500 a month collects ₱3,480,000 a year and owes neither VAT nor percentage tax. Commercial units do not get the ₱15,000 exemption. Income tax still applies to all rent.
Do not mix this up with the VAT ceiling for selling a house and lot, which RR 1-2024 raised to ₱3,600,000 from 1 January 2024. That figure has nothing to do with leasing.
5% withholding by business tenants
A tenant renting your property for use in its business withholds tax from each payment. RR 11-2018, amending RR 2-98 Sec. 2.57.2(B), sets the rate: "On gross rental for the continued use or possession of real property used in business ... Five percent (5%)". The rule has applied since RR 11-2018 took effect in 2018. It covers tenants who use the property in their business; a family renting your house to live in does not withhold. The tenant gives you BIR Form 2307, the certificate of creditable tax withheld. The 5% is an advance on your income tax, not an extra tax. You subtract it from the income tax on your annual return, and any excess can be refunded under NIRC Sec. 58(E) as amended by RA 11976. Compute it with the withholding tax calculator.
Documentary stamp tax on the lease contract
NIRC Sec. 194, as amended by TRAIN, taxes each lease at ₱6.00 "for the first Two thousand pesos (₱2,000), or fractional part thereof, and an additional Two pesos (₱2.00) for every One thousand pesos (₱1,000) or fractional part thereof, in excess of the first Two thousand pesos (₱2,000) for each year of the term". You compute it on each year's rent and add the years. On ₱300,000 a year: ₱6 + (298 × ₱2) = ₱602 a year, so a two-year lease carries ₱1,204. Under Sec. 173 the tax is payable by the person "making, signing, issuing, accepting, or transferring" the document, so the contract can say which party pays. Check your figure with the documentary stamp tax calculator.
Worked example: ₱25,000 a month commercial unit
Inputs: Maria leases a ground-floor commercial unit in Quezon City to a pharmacy for ₱25,000 a month, or ₱300,000 a year. She has no other income. A commercial unit gets no ₱15,000 exemption, and ₱300,000 is under ₱3,000,000, so she is non-VAT.
- Graduated rates with OSD: OSD 40% × ₱300,000 = ₱120,000; taxable income ₱180,000, which is in the 0% bracket, so income tax is ₱0. Percentage tax 3% × ₱300,000 = ₱9,000. Total ₱9,000.
- 8% option: 8% × (₱300,000 - ₱250,000) = ₱4,000, with no percentage tax. Total ₱4,000.
- Withholding: the pharmacy withholds 5% × ₱300,000 = ₱15,000. Under the 8% option her ₱4,000 income tax is fully covered, leaving ₱11,000 of excess credit on her annual return.
Here the 8% option saves ₱5,000. The result flips with the numbers. At ₱400,000 a year both options give ₱12,000, and graduated rates win when actual deductible expenses are large. Run your own figures in the income tax calculator before the first quarter return, since the choice is locked for the year. The 8% vs graduated guide covers the trade-off.
Second case: Juan leases commercial stalls for ₱3,600,000 a year, exclusive of VAT. He is over ₱3,000,000, so the 8% option is closed and he must register for VAT. Output VAT is 12% × ₱3,600,000 = ₱432,000, reduced by input VAT on his expenses. With the OSD his taxable income is ₱3,600,000 × 60% = ₱2,160,000, and income tax is ₱402,500 + 30% × (₱2,160,000 - ₱2,000,000) = ₱450,500.
Returns to file
- Quarterly income tax: BIR Form 1701Q, filed by every individual in business regardless of income.
- Business tax: 2551Q for percentage tax, or 2550Q for VAT, each quarter.
- Annual return by April 15 (NIRC Sec. 51(C)(1)): BIR Form 1701A if rent is your only income and you use the OSD or 8%; BIR Form 1701 if you itemize expenses or also earn a salary. A return showing zero tax is still filed. See how to file your ITR.
Missing a quarterly return is costly even when no tax is due: each late return carries a compromise penalty of ₱1,000 or more, plus surcharge and interest on any tax. See BIR penalties for the table, then file the missed returns before the BIR writes to you.
Splitting one property into several contracts does not avoid the ₱3,000,000 test, which looks at your gross annual sales, not each contract. If you later sell the property, the taxes when selling property guide and the capital gains tax calculator cover the transfer.
Sources
- RA 10963 (TRAIN): NIRC Secs. 24(A)(2), 34(L), 109(Q), 194 (Lawphil)
- RA 11976 (Ease of Paying Taxes Act): NIRC Secs. 58(E), 108(A), 109(CC), 116 (Lawphil)
- Revenue Regulations No. 13-2018 (VAT and percentage tax on residential leases) (Bureau of Internal Revenue)
- Digest of Revenue Regulations No. 8-2018 (8% option) (Bureau of Internal Revenue)
- Revenue Regulations No. 11-2018 (5% withholding on rentals; BIR Form 2307) (Bureau of Internal Revenue)
- Revenue Regulations No. 1-2024 (₱3,600,000 VAT ceiling on sale of residential dwellings) (Bureau of Internal Revenue)
- Guidelines for BIR Form No. 2551Q (Quarterly Percentage Tax Return) (Bureau of Internal Revenue)