Introduction

In the Philippines, the sale of real property is a significant financial transaction that often triggers tax obligations under the country's tax laws. One of the primary taxes applicable to such sales is the Capital Gains Tax (CGT), which is levied on the gains realized from the disposition of capital assets, particularly real estate. This tax ensures that the government captures a portion of the profit derived from appreciating property values. Understanding how to calculate CGT is crucial for property owners, buyers, sellers, real estate professionals, and investors to ensure compliance and avoid penalties.

This article provides a comprehensive overview of CGT on property sales in the Philippine context, covering its legal foundation, applicability, computation methods, exemptions, procedural requirements, and related considerations. It draws from the provisions of the National Internal Revenue Code (NIRC) of 1997, as amended by subsequent laws such as the Tax Reform for Acceleration and Inclusion (TRAIN) Law (Republic Act No. 10963) and other relevant regulations issued by the Bureau of Internal Revenue (BIR).

Legal Basis

The imposition of CGT on the sale of real property is primarily governed by Section 24(D) of the NIRC for individual taxpayers and Section 27(D)(5) for corporate taxpayers. These provisions stipulate that gains from the sale or disposition of real property classified as capital assets are subject to a final tax.

Key legislative developments include:

The NIRC of 1997, which established the current framework for CGT.
The TRAIN Law of 2017, which retained the 6% CGT rate but introduced adjustments to income tax brackets and other taxes, indirectly affecting property transactions.
Revenue Regulations (RR) issued by the BIR, such as RR No. 7-2003 (on the sale of principal residences) and RR No. 8-2013 (on the determination of fair market value), which provide detailed guidelines for implementation.
Other related laws, like Republic Act No. 9646 (Real Estate Service Act), which regulates real estate professionals involved in property sales, and Republic Act No. 11534 (Corporate Recovery and Tax Incentives for Enterprises or CREATE Act), which may impact corporate property disposals.

The tax is considered a final withholding tax, meaning it is withheld at source and constitutes the full settlement of the taxpayer's liability for the gain, without needing to include it in annual income tax returns.

Definition of Capital Assets and Scope of CGT

Under Section 39(A) of the NIRC, capital assets are defined as property held by the taxpayer (whether or not connected with their trade or business) that is not:

Stock in trade or inventory.
Property primarily held for sale to customers in the ordinary course of business.
Property used in trade or business subject to depreciation.
Real property used in trade or business.

For real property, this typically includes residential lots, condominiums, houses, agricultural land (if not used in business), and other non-business real estate. If the property is classified as an ordinary asset (e.g., held by a real estate dealer), the gain is treated as ordinary income subject to regular income tax rates (up to 35% for individuals or 25-30% for corporations under CREATE), not CGT.

CGT applies to:

Sales, exchanges, or other dispositions of real property located in the Philippines.
Taxpayers who are citizens, resident aliens, non-resident aliens engaged in trade or business, domestic corporations, or resident foreign corporations.

For non-resident aliens not engaged in trade or business or non-resident foreign corporations, CGT is imposed at 6% on the gain, but the tax base may differ.

Dispositions that trigger CGT include not just outright sales but also exchanges, donations (treated as sales at fair market value), foreclosures, and inheritance distributions if considered a disposition.

Tax Rate and Base for Computation

The CGT rate is a flat 6% applied to the tax base, which is the higher of:

The gross selling price (GSP), as indicated in the Deed of Sale or other transfer document.
The current fair market value (FMV), determined as the higher of:
- The zonal value established by the BIR (based on Revenue District Office valuations).
- The assessed value from the local government unit (LGU), such as the provincial or city assessor's office.

This "whichever is higher" rule prevents underreporting of the transaction value to minimize tax liability.

Steps in Computation

Determine the Tax Base: Compare GSP and FMV; use the higher amount.
Apply the Rate: Multiply the tax base by 6%.
Subtract Any Applicable Credits or Adjustments: Generally none, but in cases of installment sales, the tax is prorated.

For installment sales (where payment is in installments over time), CGT is computed on the proportion of the payment received in the year of sale relative to the total contract price, under Section 49 of the NIRC and RR No. 16-2005.

Example Calculations

Simple Sale: A residential lot is sold for PHP 5,000,000. The BIR zonal value is PHP 4,000,000, and LGU assessed value is PHP 3,500,000. Tax base = PHP 5,000,000 (higher than FMV of PHP 4,000,000). CGT = PHP 5,000,000 × 6% = PHP 300,000.
Undervalued Sale: If the same lot is sold for PHP 3,000,000 but zonal value is PHP 4,000,000, tax base = PHP 4,000,000. CGT = PHP 240,000.
Installment Sale: Total contract price PHP 10,000,000, initial payment PHP 2,000,000. Initial CGT = (PHP 2,000,000 / PHP 10,000,000) × (PHP 10,000,000 × 6%) = PHP 120,000. Subsequent payments are taxed proportionally.

Note that costs like broker's commissions, improvements, or acquisition costs do not reduce the tax base for CGT purposes, unlike in some jurisdictions where net gain is taxed. The tax is on gross proceeds, not net gain.

Exemptions and Exclusions

Several exemptions mitigate the CGT burden:

Principal Residence Exemption (Section 24(D)(2) and RR No. 7-2003): No CGT if the property sold is the seller's principal residence (family home) and the proceeds are fully utilized to acquire or construct a new principal residence within 18 months. Requirements include:
- Certification from the Barangay Chairman confirming it's the principal residence.
- Escrow agreement with the BIR for the proceeds if not immediately used.
- If proceeds exceed the cost of the new residence, the excess is taxable proportionally.
- Limited to one exemption per lifetime per taxpayer.
Expropriation by Government: If property is expropriated for public use, gains may be exempt if reinvested in similar property within a specified period.
Corporate Reorganizations: Under Section 40(C)(2), mergers or consolidations may allow tax-free exchanges if certain conditions are met.
Agricultural Land under CARP: Sales of agricultural land covered by the Comprehensive Agrarian Reform Program (CARP) may be exempt or subject to reduced rates.
Properties Sold to Government: Exempt if for public purposes, but subject to verification.

Exclusions also apply to properties classified as ordinary assets or those outside the Philippines (CGT only on Philippine-situs property).

For non-residents, exemptions may not apply, and double taxation treaties could provide relief.

Other Taxes and Costs Associated with Property Sales

While focusing on CGT, property sales often involve:

Documentary Stamp Tax (DST): 1.5% on the higher of GSP or FMV (Section 196, NIRC).
Withholding Tax: Creditable withholding tax (CWT) of 1.5-6% for ordinary assets.
Local Transfer Tax: Up to 0.75% imposed by LGUs.
Value-Added Tax (VAT): 12% if the seller is in the business of selling properties and the threshold (PHP 3,199,200 annually) is exceeded.
Donor's Tax: If the transfer is a donation, 6% on the FMV.

These are separate from CGT and must be paid accordingly.

Filing and Payment Procedures

Responsibility: The buyer typically withholds and remits the CGT, but the seller is ultimately liable.
Timeline: Payment must be made within 30 days from the date of notarization of the Deed of Sale using BIR Form 1606 (for CGT) via authorized agent banks or eFPS (Electronic Filing and Payment System).
Documents Required:
- Deed of Absolute Sale.
- Tax Declaration.
- Certificate Authorizing Registration (CAR) from BIR, necessary for title transfer.
- Proof of FMV (zonal value certificate).
Installment Sales: File BIR Form 1706 for initial declaration.
BIR Clearance: A CAR must be obtained before the Register of Deeds can transfer the title.

Failure to secure CAR can delay property registration.

Penalties for Non-Compliance

Non-payment or underpayment incurs:

Surcharge: 25% or 50% (if willful neglect or fraud).
Interest: 12% per annum (post-TRAIN rate).
Compromise Penalties: Ranging from PHP 1,000 to PHP 50,000.
Criminal Liability: For tax evasion, imprisonment and fines under Section 255 of the NIRC.

The BIR conducts audits and may reassess taxes if undervaluation is suspected.

Recent Updates and Reforms

The TRAIN Law maintained the 6% CGT rate but increased the VAT threshold for property sales. The CREATE Act reduced corporate income tax rates, potentially affecting corporate property holdings. Ongoing proposals in Congress, such as tax amnesty programs or adjustments to zonal values, may influence future computations. During the COVID-19 pandemic, extensions for filings were granted via BIR issuances.

Taxpayers should monitor BIR Revenue Memorandum Circulars (RMCs) for updates, such as RMC No. 27-2020 on electronic submissions.

Conclusion

Calculating Capital Gains Tax on property sales in the Philippines requires careful consideration of the tax base, rate, exemptions, and procedural steps to ensure compliance with the NIRC and related regulations. While the 6% flat rate simplifies the process compared to net gain-based systems, the "whichever is higher" rule on GSP and FMV underscores the importance of accurate valuation. Property owners are advised to consult with tax professionals or the BIR for case-specific advice, as miscalculations can lead to significant penalties. Proper planning, especially for exemptions like the principal residence rule, can substantially reduce tax liabilities and facilitate smooth transactions.