Capital gains tax (CGT) on the sale of real estate in the Philippines is a final tax imposed on the presumed gain from the disposition of real property classified as a capital asset. Governed primarily by Section 24(D) of the National Internal Revenue Code (NIRC) of 1997, as amended, the tax applies to sales, exchanges, dispositions, including pacto de retro sales and conditional sales, of land, buildings, and other real properties located in the Philippines. The rules distinguish between capital assets and ordinary assets, impose a flat rate on a gross basis rather than actual net gain, and provide targeted exemptions, notably for principal residences.

Classification of Real Property: Capital Assets vs. Ordinary Assets

The tax treatment hinges on whether the property is a capital asset or an ordinary asset.

Capital assets include real properties not used in trade or business and not held primarily for sale to customers in the ordinary course of trade or business. Examples: a family home, vacation property, or investment land held by a non-dealer individual or corporation. Sales of capital assets by individuals, estates, trusts, and domestic corporations trigger the 6% CGT.
Ordinary assets include real properties held for sale in the ordinary course of business (e.g., by licensed real estate dealers or developers), properties used in trade or business (e.g., rental properties if part of a regular leasing business), or properties previously used in business but converted. These are subject to regular income tax rates—graduated rates up to 35% for individuals or the corporate income tax rate (generally 25% under the CREATE Law for domestic corporations)—plus 12% value-added tax (VAT) if the seller is VAT-registered, and creditable withholding tax.

Classification depends on facts and circumstances, such as frequency of sales, advertising, licensing as a real estate dealer, and intent. Real properties used in business by non-real-estate taxpayers may convert to capital assets if unused in business for more than two years prior to sale. BIR rulings often guide borderline cases.

Tax Rate and Tax Base

For capital assets, a flat final tax of 6% applies. The tax is computed on the higher of:

The gross selling price (GSP) stated in the deed of sale; or
The fair market value (FMV), determined as the highest among the BIR zonal value (if available) and the assessed value per the latest tax declaration from the provincial or city assessor.

This gross basis means the seller cannot deduct the original cost, improvements, or selling expenses. The tax is presumed to cover any gain, even if the actual gain is lower or if the property is sold at a loss.

Example 1 (Standard Computation):
A residential lot with a gross selling price of ₱5,000,000 has a BIR zonal value of ₱6,500,000 and an assessed value of ₱4,800,000.
Tax base = ₱6,500,000 (highest value).
CGT due = 6% × ₱6,500,000 = ₱390,000.

Example 2 (Undervalued Sale):
Property sold for ₱3,000,000 but zonal value is ₱4,500,000 and assessed value is ₱4,200,000.
Tax base = ₱4,500,000.
CGT = 6% × ₱4,500,000 = ₱270,000. The BIR disregards the lower stated price for tax purposes.

For domestic corporations, the same 6% final tax applies to land and/or buildings classified as capital assets. Foreign corporations generally face regular corporate income tax on gains from real property dispositions classified as capital assets, though specific rules may vary for certain structures.

Principal Residence Exemption

Natural persons (citizens or resident aliens) may claim full or partial exemption from CGT when selling their principal residence—the dwelling house where the taxpayer and family habitually and actually reside, typically supported by barangay certification, utility bills, or other proof.

Conditions for Exemption (NIRC Section 24(D)(2)):

The seller must notify the Bureau of Internal Revenue (BIR) of the intention to avail the exemption within 30 days from the date of sale or disposition, using the prescribed return (BIR Form 1706 with attached sworn declaration).
The entire proceeds of the sale must be fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale.
The exemption may be availed of only once every ten (10) years.
The historical cost or adjusted basis of the old principal residence carries over to the new one.

If proceeds are only partially utilized, the exemption applies proportionately. The taxable portion is computed as:
(Unutilized proceeds / Total proceeds) × Presumed gain (or the full 6% CGT amount).
The seller must submit proof of utilization (e.g., deed of sale/purchase, construction contracts, official receipts) to the Revenue District Office (RDO) within 30 days after the 18-month period expires. Failure to fully utilize or provide proof results in assessment of the tax plus penalties.

The exemption applies only to natural persons and requires the new residence to qualify as a principal residence. Non-resident aliens generally do not qualify for this relief.

Example 3 (Partial Reinvestment):
Property sold for ₱10,000,000 (tax base ₱10,000,000 after comparing values). Potential CGT = ₱600,000.
Seller reinvests ₱8,000,000 in a new home within 18 months.
Unutilized portion = ₱2,000,000 (20%).
Taxable CGT = 20% × ₱600,000 = ₱120,000.

Other Exemptions and Special Rules

Sales to the Government: The taxpayer may elect between the 6% CGT or ordinary income tax treatment under Section 24(A).
Inheritances and Donations: No CGT on transfer by succession or donation (subject instead to estate tax or donor’s tax). The heir or donee’s basis becomes the fair market value at the time of death or donation. Subsequent sale by the heir triggers CGT using that stepped-up basis for classification purposes.
Barter or Exchange: Taxed on the fair market value of the property received (or given, if higher), applying the 6% rate to the higher of that value or zonal/assessed values.
Installment or Conditional Sales: The full CGT is generally computed on the entire selling price and due within 30 days of the notarized deed, though practical arrangements may apply in long-term installments. The buyer issues a promissory note or similar instrument.
Foreclosure and Auction Sales: The mortgagor (seller) remains liable for CGT on the bid price or FMV, whichever rules apply.
Socialized Housing and Low-Cost Units: Certain sales qualifying under socialized housing laws may enjoy exemptions or reduced rates under specific statutes.
Corporate Liquidation or Reorganization: Special rules may defer or adjust recognition of gain.

Filing, Payment, and Transfer Requirements

The seller files BIR Form 1706 (Capital Gains Tax Return) and pays the tax within 30 days from the date of sale or execution of the public instrument (notarization). Payment is made to the Authorized Agent Bank or RDO where the property is located.

To effect transfer of title at the Registry of Deeds, the buyer requires a Certificate Authorizing Registration (CAR) issued by the BIR. Issuance of the CAR requires:

Proof of full CGT payment (or approved exemption).
Payment of Documentary Stamp Tax (DST).
Clearance for other obligations (e.g., real property taxes).

Documentary Stamp Tax (DST) on the sale is 1.5% of the higher of the GSP or FMV (zonal or assessed value), paid by the seller or as agreed in the deed (usually within five days after the close of the month of execution).

Local government units also impose a transfer tax (typically 0.5% to 0.75% of the selling price or FMV, depending on whether the property is in a province or city).

Real property taxes must be updated and cleared up to the date of sale.

Related Taxes in Real Estate Transactions

While CGT applies only to capital assets:

Ordinary asset sales incur 12% VAT (on gross selling price, passed on to buyer), creditable withholding tax (rates vary: e.g., 1.5%–6% depending on seller type and price), DST, and local transfer tax. The seller reports the gain as ordinary income.
Non-VAT-registered sellers of capital assets avoid VAT.

Buyers should verify the seller’s status to determine applicable taxes and potential withholding obligations.

Compliance, Penalties, and Administrative Rules

Failure to file or pay CGT within the 30-day period incurs a 25% surcharge, 20% annual interest (or the prevailing rate), and possible compromise penalties. Late issuance of CAR delays title transfer and may expose parties to additional assessments.

The BIR uses zonal valuations updated periodically and cross-checks with assessor values to prevent undervaluation. Taxpayers must maintain records of the transaction, including the deed, tax declarations, and proof for exemptions.

For estates or trusts selling inherited property, the fiduciary files on behalf of the beneficiaries, with tax allocated proportionally.

Non-resident sellers (aliens) remain subject to the 6% CGT on Philippine-situs real property, with possible treaty relief in limited cases, though most tax treaties do not override the final tax on real property gains.

Practical Considerations and Best Practices

Sellers should:

Obtain a certified true copy of the latest tax declaration and zonal valuation from the BIR and assessor’s office before negotiating the sale.
Consult on classification to avoid reclassification disputes.
For principal residence claims, prepare the 30-day notification meticulously and track the 18-month reinvestment strictly.
Agree in the deed of sale who bears each tax and fee, though CGT liability is primarily the seller’s under law.

Buyers should demand proof of tax clearances and CAR to ensure clean title.

The rules promote transparency and curb undervaluation while offering relief for homeowners relocating within the prescribed period. Compliance requires coordination with the BIR RDO, notaries, and registries of deeds. Taxpayers facing complex transactions—such as partial interests, multiple owners, or disputed classifications—should seek formal BIR rulings for certainty.

These provisions reflect the balance between revenue collection on presumed gains and facilitation of residential mobility and property market activity in the Philippines.