Introduction

In the Philippine tax system, the sale of real property can trigger capital gains tax (CGT), a form of income tax imposed on the profit or gain realized from the disposition of capital assets. This tax is governed primarily by the National Internal Revenue Code (NIRC) of 1997, as amended by subsequent laws such as Republic Act No. 10963 (Tax Reform for Acceleration and Inclusion or TRAIN Law) and other relevant Bureau of Internal Revenue (BIR) regulations. For a property sale valued at P3 million, understanding CGT is crucial for sellers, buyers, and real estate professionals to ensure compliance and avoid penalties.

CGT applies specifically to capital assets, which include real properties not held for sale in the ordinary course of business. This article provides a comprehensive overview of CGT calculation on such a sale, including legal basis, exemptions, procedural requirements, and practical considerations, all within the Philippine context.

Legal Framework for Capital Gains Tax on Real Property

The NIRC, under Section 24(D) for individuals and Section 27(D) for corporations, establishes CGT on the sale, exchange, or other disposition of real property classified as a capital asset. The tax rate is a flat 6% based on the gross selling price or the current fair market value (FMV), whichever is higher. This is a final tax, meaning it is withheld at source and does not form part of the seller's gross income for income tax purposes.

Key definitions:

Capital Asset: Real property held by the taxpayer but not used in trade or business, such as residential lots, vacation homes, or investment properties. If the property is an ordinary asset (e.g., inventory for a real estate developer), it is subject to regular income tax instead of CGT.
Disposition: Includes sales, exchanges, or barter. Inheritances or donations may have different tax treatments (e.g., donor's tax or estate tax).
Fair Market Value: Determined by the higher of the zonal value set by the BIR or the assessed value from the local government unit (LGU). Zonal values are periodically updated and available on the BIR website or through Revenue District Offices (RDOs).

Under the TRAIN Law (effective January 1, 2018), the CGT rate remained at 6%, but it expanded the base to ensure the tax reflects the property's true value, preventing underdeclaration.

When Does CGT Apply to a P3 Million Property Sale?

CGT is imposed on the sale of real property located in the Philippines, regardless of the seller's residency status (resident citizens, non-resident citizens, resident aliens, or non-resident aliens). For a P3 million sale:

If the property is a capital asset, CGT applies.
If it's the principal residence of an individual seller, it may qualify for exemption (discussed below).
Sales by corporations or partnerships follow similar rules, but with potential creditable withholding tax implications.

Notable scenarios where CGT does not apply:

Sales of ordinary assets (taxed at progressive rates up to 35% for individuals or 30% for corporations).
Foreclosures, where the tax may shift to redemption periods.
Government expropriations, which may be exempt under certain conditions.

Calculation of Capital Gains Tax

The CGT is computed as 6% of the tax base, which is the higher of:

Gross Selling Price (GSP): The total consideration received, including cash, installments, or fair value of property exchanged.
Fair Market Value (FMV): Based on BIR zonal value or LGU assessed value.

Formula: CGT = 6% × (Higher of GSP or FMV)

Example for a P3 Million Sale

Assume a residential lot in Quezon City is sold for P3,000,000. The BIR zonal value is P4,000 per square meter, and the lot is 800 sqm, making FMV = P3,200,000. The LGU assessed value is P2,800,000.

Higher base: P3,200,000 (zonal value).
CGT: 6% × P3,200,000 = P192,000.

If the GSP was P3,500,000 and FMV P3,200,000, the base would be P3,500,000, resulting in CGT of P210,000.

For installment sales, CGT is prorated based on collections, but the full tax must be paid within 30 days of each installment if the initial payment exceeds 25% of the GSP.

Adjustments to the base:

Deductible costs: While CGT is on gross amounts, the actual gain (selling price minus acquisition cost and improvements) is not deducted for CGT purposes—it's a presumptive tax. However, for documentation, sellers should maintain records of basis for potential audits.
Incidental expenses: Broker's commissions, documentary stamp tax (DST), and transfer fees are not deductible from the base but may be claimed as expenses in income tax returns if applicable.

Exemptions and Relief Measures

Several exemptions can reduce or eliminate CGT liability on a P3 million sale:

Principal Residence Exemption (Section 24(D)(2), NIRC):
- If the property sold is the seller's principal residence (family home), and the proceeds are used to acquire or construct a new principal residence within 18 months.
- Exemption limit: Full CGT exemption if the new residence costs at least the selling price of the old one.
- Requirements: File a sworn declaration with the BIR, and escrow the CGT amount until proof of reinvestment is submitted.
- For a P3 million sale, if P3 million or more is reinvested, no CGT is due. Partial reinvestment prorates the exemption.
Exemption for Senior Citizens and PWDs:
- Under Republic Act No. 7432 (Senior Citizens Act) and Republic Act No. 7277 (Magna Carta for PWDs), as amended, sales of residential properties by seniors or PWDs may qualify for exemptions if used as their dwelling.
Corporate Reorganizations:
- Tax-free exchanges in mergers, consolidations, or transfers to controlled corporations under Section 40(C)(2) of the NIRC, provided no gain or loss is recognized.
Low-Value Properties:
- No specific threshold for exemption based on value, but properties sold below P100,000 may have simplified procedures.
Other Relief:
- During calamities, the BIR may suspend CGT collection via Revenue Regulations.

Non-compliance with exemption conditions (e.g., failure to reinvest) results in retroactive CGT imposition plus penalties.

Related Taxes and Costs in Property Sales

A P3 million sale involves other taxes beyond CGT:

Documentary Stamp Tax (DST): 1.5% of the higher of GSP or FMV (e.g., P45,000 on P3 million).
Withholding Tax: Creditable withholding tax (CWT) of 1.5% to 6% may apply if the seller is engaged in real estate business.
Local Transfer Tax: Up to 0.75% imposed by LGUs.
Value-Added Tax (VAT): 12% if the seller is VAT-registered and the property is an ordinary asset; threshold for VAT on real property sales is P3,199,200 (as adjusted).
Donor's or Estate Tax: If the transfer is not a bona fide sale.

Buyers bear registration fees with the Registry of Deeds.

Procedural Requirements for Payment and Filing

Filing Returns:
- BIR Form 1706 (CGT Return) must be filed within 30 days from the sale date.
- For installment sales, file for each collection.
Payment:
- Pay at Authorized Agent Banks (AABs) or Revenue Collection Officers.
- The notary public or buyer often withholds and remits the CGT.
Documentation:
- Deed of Absolute Sale.
- Taxpayer Identification Number (TIN).
- Proof of FMV (zonal value certificate).
- Certificate Authorizing Registration (CAR) from BIR, required for title transfer.
Electronic Filing:
- Use eBIRForms for online submission.

Failure to obtain CAR blocks title transfer, exposing parties to liabilities.

Penalties for Non-Compliance

Violations attract:

Surcharge: 25% (or 50% for willful neglect/fraud).
Interest: 12% per annum.
Compromise Penalties: P1,000 to P50,000 depending on the offense.
Criminal Penalties: Fines up to P100,000 and imprisonment for tax evasion.

The BIR conducts audits via its Large Taxpayer Service or RDOs, and underreporting FMV is a common issue.

Practical Considerations and Planning Strategies

For a P3 million sale:

Valuation Disputes: Sellers can request BIR appraisal if zonal values seem outdated.
Tax Planning: Consider holding periods; while no holding period discount exists for CGT (unlike stocks), long-term ownership may affect basis for other taxes.
Inflation Impact: FMV adjustments help account for appreciation.
International Aspects: Non-residents pay CGT, but tax treaties (e.g., with the US) may provide relief.
Post-Sale Obligations: Retain records for at least 3 years for audits.

Sellers should consult a tax professional or lawyer to navigate complexities, especially for high-value transactions like P3 million properties.

Conclusion

Calculating CGT on a P3 million property sale in the Philippines involves a straightforward 6% tax on the higher of GSP or FMV, but exemptions, related taxes, and procedures add layers of complexity. Compliance ensures smooth transactions and avoids hefty penalties. As tax laws evolve, staying informed through BIR issuances is essential for all stakeholders in the real estate sector.